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I’m watching this FTSE 250 stock for 2020

With only four full months left in 2019 I’m thinking about which stocks are likely to be worth watching in the coming year. I think Tate & Lyle (LSE: TATE) is a strong contender for growth in 2020. Year-to-date its share price has seen a high of £8 but is now around £7, at a 37% discount to its estimated future cash flow value. Rumours of a takeover bid apparently caused the spike, but these were quickly quashed. 

Sugar shake-up

When I see the Tate & Lyle brand I immediately think of sugar. However, its European sugar business (Tate & Lyle Sugars) was sold to American Sugar Refining in 2010 and now the main purpose of Tate & Lyle is specialist ingredients for food producers with a focus on healthy alternatives. It is a global business with a team of scientists working with customers on perfecting taste and textures and adding nutrients to food. Ironically, many of its ingredients and solutions for the food, beverage and industrial markets are designed to reduce sugar, as well as calories and fat, whilst also adding fibre. All vitals of a healthy modern diet.

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The company has three main divisions and a growing portfolio of ingredients. Its Primary Products division produces high-fructose corn syrup and starches; its Sucralose division manufacturers zero-calorie artificial sweeteners; and Food & Beverage Solutions concentrates on specialist ingredients. In its financial report to the end of March 2019, it reported strong financial progress, particularly for Sucralose.

This FTSE 250 giant has a market cap of £3bn, earnings-per-share of 38.6p and a dividend yield of 4%. The dividend has been stable for 21 years. It has a debt ratio of 47% and it has been consciously driving down net debt through delivering strong cash flow.

Strategically placed

Rising global obesity rates and diabetes are putting pressure on governments to constrain sugary food consumption. In addition, consumer demand for natural foods is forcing food makers to rewrite their recipes, reducing salt, sugar and fat content. Tate & Lyle is already assisting companies to do this, but is well placed for further expansion. According to a report by Zion Market Research in May, the global natural sweeteners market will reach $37.6bn by 2025 up 39% from $27bn in 2018.

TATE’s shares have risen 35% since CEO Nick Hampton took over in April 2018 and I foresee continued growth throughout 2020 because with healthy eating continuing to be a key concern of Western society, the company is fixated on helping make food healthier through sugar content reduction. As mentioned, I think it’s somewhat ironic for a brand that was once key in sugar consumption, but it’s a positive direction for growth and a great example of brand diversification.

The firm has a profit margin of 7% and an operating margin of 10%, while its price-to-earnings ratio is 18.

Its EV/EBITDA is just 8. This is its enterprise-value-to-EBITDA ratio and is a way to measure a company’s performance. It’s calculated by dividing the enterprise value of a company by its earnings before interest, taxes, depreciation, and amortisation. A low figure is better, and at 8, Tate & Lyle’s is lower than the industry average of 11.69.

Overall, I think there’s a lot to like about this company. Its leadership team also seems to be proactive, while the company has financial stability, cash for acquisitions, is well placed to meet rising consumer demand, and delivers a reasonable dividend. I deem Tate & Lyle a Buy.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.