Low corn prices, high contract prices for 2006 for sweeteners, and more people around the world developing sweet teeth -- it should be a good year for Corn Products (NYSE:CPO), right? It turns out the answer isn't a simple yes.
Although Corn Products is one of the four players that collectively control 97% of the corn syrup market (along with ADM (NYSE:ADM), Cargill, and Tate & Lyle), that position hasn't yet ever translated into the sort of return on invested capital that usually marks high-quality companies in industries with sustainable competitive advantages.
And it wasn't as though the fourth quarter was a brilliant performance, either. Revenue was up all of 2% and would have actually been negative were it not for some foreign currency benefits. Margins, too, were challenged -- the gross margin slipped about 80 basis points, and the operating margin fell when you exclude plant closing costs from the year-ago period. Likewise, operating income was actually lower than last year on that adjusted basis.
While good growth in free cash flow was a marked positive (up about 73% to $109 million), the weak mid-single-digit return on invested capital mutes my enthusiasm for that performance. Simply put, I believe ROIC is a good means of separating good companies/good managers from the herd, and Corn Products needs to do better on this score.
2006 already looks like one of those years that's going to present both challenges and opportunities. Securing contracts for the year with low-teens price increases (the highest in quite some time) is definitely an opportunity, as is the installation of a coal-fired boiler at one of the company's facilities. On the other hand, the company seems to have hedged natural gas at a somewhat high price, and Canada's recent import duty on American corn will hurt margins in the Canadian business.
Overall, this is a story that should work. Corn Products has admirable global diversity and a strong position in Latin/South America -- a major consumer of sweet drinks (in the U.S, major beverage companies such as Motley Fool Inside Value pick Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP) are prime consumers of corn-based sweeteners). Maybe this is the year when Corn Products starts posting better results, but current prices don't encourage me to jump in ahead of the proof.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
