According to Zack’s this dairy-based nutritional company has recently entered oversold territory.
Synutra International (SYUT)
from The Value Bounce
Sharply rising incomes across the emerging world has created surging demand for protein—and this means there is big money in meat and dairy. Demand for butter, whole-milk powder and fresh milk products will grow at 26% a year or greater through at least 2020. Demand for cheese and skim milk powder will grow around 20%. Dairy exports from the U.S. were up 19% last year, mainly because of demand from China.
Take a look at this chart from the United Nations Food and Agricultural Organization.
Clearly, dairy prices are volatile in certain years. But the chart also shows clearly that dairy prices are in a long-term uptrend—precisely because of the growing consumption of milk in non-Western economies that are first spending their increasing discretionary income on better food.
Synutra International (SYUT), a Rockville, Maryland-based company, owns and operates six subsidiaries in China that are all engaged in different stages of production, distribution and sales of dairy-based infant and nutritional formulas.
SYUT’s stock has seen better days. In 2008, it reached $49 and in 2010, it rose to $24. There are several reasons for the decline. First, China and “China-theme” stocks have fallen out of favor. Second, there have been a few dairy and infant formula scandals in China, which have hit the industry as a whole, though none have been due to lack of quality control by Synutra. The Chinese government has cracked down on suppliers and the company welcomes a greater focus on quality controls.
Synutra stock is off 30% during the last three months, putting it at just 14 times expected March 2014 earnings, and less than ten times projected March 2015 earnings.
For its last reported quarter, revenue was up 38%, and net income per share was up 64%, with return on equity an impressive 61%. Zack’s consensus earnings estimates are rising, and Synutra has had a great track record of beating earnings estimates. The last four quarters, it has beat by 125% on average. This may account for the stock’s recent “value bounce”.
SYUT has had a significant breakout to the upside and has pulled back considerably. If you take the move from the lows in July 2013 to the highs of November 2013, you can see the stock is very near the 76% retracement level. This could very well be the bottom and a support level for SYUT.
Insiders at Synutra hold 62% of the company’s stock, and well-respected Warburg Pincus owns 23% of outstanding shares. Finally, Nestle is, of course, a much larger competitor with a much slower growth rate, but its stock trades at a PEG ratio (price to earnings/growth) of 8 times SYUT, and a price to sales ratio 2.5 times that of SYUT.
Buy SYUT up to $6.50 with 15% trailing stop loss.
Carl Delfeld, The Value Bounce, www.thevaluebounce.com, 800-250-9657, April 26, 2014