On Tuesday, JPMorgan shifted its stance on Gruma SAB de CV (GRUMAB:MM) (OTC: OTC:GPAGF), raising the stock from Neutral to Overweight and increasing its price target to Peso410.00 from Peso350.00. The upgrade comes despite recent antitrust threats in Mexico, which the firm believes have led to an overreaction in the market.
The bank's analysis suggests that the Mexican market, which contributes 21% to Gruma's normalized EBITDA, has less impact on the company's valuation compared to the U.S. market, which represents 65% and is experiencing faster growth. This growth in the U.S. is driven by a shift towards more premium product offerings.
JPMorgan's assessment indicates that even in a worst-case scenario, where Gruma might be forced to divest up to 30% of its Mexican operations, the potential impact on the company's valuation would be limited to approximately Peso22 per share.
This figure represents a mere 5.4% of the fair value, which contrasts sharply with the roughly 10% drop in Gruma's share price the day before the upgrade.
The firm maintains a positive outlook on Gruma's U.S. business, highlighting the increasing popularity of the "better for you" premium product line.
This segment is expected to contribute significantly to the company's growth, with projections of a 3-year EPS compound annual growth rate (CAGR) of 12% and a return on equity (ROE) of 27%.
In other recent news, Gruma, a leading producer of corn flour and tortillas, has been directed by Mexico's competition authority, Cofece, to divest certain assets and modify commercial practices.
This ruling comes after an extensive investigation revealed Gruma's significant market dominance, controlling between 50% and 90% of the corn flour and tortilla market.
The company now faces the task of adjusting its business strategies to comply with Cofece's directives aimed at fostering a more competitive environment in the sector.
The investigation by Cofece included the production, distribution, and marketing of corn and corn flour, along with associated services. The findings have been published in the official government gazette.
The corn flour and tortilla market is of great importance to Mexico's economy and consumer well-being, particularly due to its influence on tortilla prices, a staple food in the country. Gruma, with its global operations, has yet to respond to the ruling publicly.
InvestingPro Insights
Recent data from InvestingPro aligns with JPMorgan's optimistic outlook on Gruma SAB de CV (OTC: GPAGF). The company's P/E ratio of 12.51 and PEG ratio of 0.32 suggest that the stock may be undervalued relative to its earnings growth potential, supporting JPMorgan's decision to upgrade the stock to Overweight.
InvestingPro Tips highlight that Gruma has been aggressively buying back shares and offers a high shareholder yield, which could be seen as a sign of management's confidence in the company's future prospects. Additionally, the company has maintained dividend payments for 11 consecutive years, demonstrating a commitment to returning value to shareholders.
The company's strong financial position is further evidenced by its ability to operate with a moderate level of debt and liquid assets exceeding short-term obligations. This financial stability may provide Gruma with the flexibility to navigate potential regulatory challenges in Mexico while continuing to invest in its growing U.S. business.
For investors seeking more comprehensive analysis, InvestingPro offers 12 additional tips for Gruma, providing a deeper understanding of the company's market position and potential.
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