Shares of Ingredion (NYSE: INGR) dropped as much as 11% today after the company announced preliminary results for the second quarter of 2018, which prompted management to revise full-year 2018 guidance lower. The previous guidance called for adjusted EPS of $7.90 to $8.20, but expectations are now within the range of $7.50 to $7.80 due to lower-than-expected demand in North American markets.
While the disappointing news was paired with a new operational efficiency initiative that is expected to save $125 million per year, Wall Street isn't very interested in that idea. As of 2:19 p.m. EDT, the stock had settled to a 10% loss. Ingredion shares are down 28% year to date.
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On one hand, the reaction to today's news is understandable considering the company has struggled to grow its top line in recent years. Ingredion only managed to grow sales from $5.66 billion in 2014 to $5.83 billion in 2017, which works out to just 3% total in three years. A stagnant top line runs the risk of jeopardizing growth on the bottom line. Wall Street is interpreting the recently announced operational efficiency program as a sign that there aren't any readily accessible profit-enhancing opportunities for the business.
On the other hand, management might not be waving the white flag just yet. While Ingredion does need to find new growth opportunities and adjust to changing realities in the food ingredients market (such as pivoting to low-calorie sweeteners), the company says it's on track to boost specialty ingredients sales to $2 billion by 2022. The portfolio of high-margin products is expected to represent 32% to 35% of total sales that year.
That hints that Ingredion still will be struggling to grow its top line, as those numbers point to annual revenue of $5.71 billion to $6.25 billion in 2022. But it will be higher-margin revenue and generated (hopefully) from more future-proof sweetener ingredients. And management does have a track record of delivering growth on the bottom line: Net earnings have grown from $355 million in 2014 to $519 million last year.
Investors never want to see full-year guidance lowered for any reason, especially when a company has struggled to deliver top-line growth. However, while Ingredion does have some work to do to position itself for the long run, management has delivered bottom-line growth in recent years, so shareholders shouldn't panic over the latest news. Depending on further updates provided on the second-quarter 2018 earnings conference call, this could even prove to be a buying opportunity -- but I would wait for more details before jumping in.
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