Market Overview

Is Penford's Price Appropriate?

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Price: $8.15
Forward P/E: 41
Earnings Growth: N/A
Projected Sales Growth: 16.6%
Market Cap: $92.25 million

Why it's Featured: Natural based systems and gluten free products.
Watch Out For: Valuation is high unless management really hits the forecasted numbers; still very small.

Penford Corporation (NASDAQ: PENX) engages in the development, manufacture, and marketing of specialty natural-based ingredient systems for food and industrial ingredient applications primarily in the United States. 

It develops and manufactures ingredients with starch as a base. The starch products are made primarily from corn and potatoes, and are used as binders and coatings in paper and food production, as well as an ingredient in fuel.

The company's Industrial Ingredients segment provides specialty starches to paper and packaging industries in ethylated, oxidized, and cationic forms.  Its ethylated and oxidized starches are used in coatings and as binders, providing printability to fine white, magazine, and catalog paper; and cationic and other liquid starches are used in the paper forming process in paper production, providing the bonding of paper fibers and other ingredients. This segment also produces and sells fuel grade ethanol.

The Food Ingredients group offers specialty starches and dextrins to the food manufacturing and food service industries.  Its specialty starches are used in coatings for various products, such as French fries sold in restaurants, as well as moisture binders in a range of foods, including canned products, sauces, whole and processed meats, dry powdered mixes, and other food and bakery products.

Penford Corporation sells through a direct sales force, as well as through distributor agreements to manufacturers and processors. The company was founded in 1894 and is headquartered in Centennial, Colorado.

This stock traded at $5.00 at the beginning of the year.  Today, it's up 65%...in 6 months, that's a great return.  That's enough to make investors curious at the very least.  And look for answers as to why.  More importantly, to ask if it's only the beginning of a longer, sustained upward move or maybe, just maybe, there's a little too much enthusiasm baked into the price.

As always, you have to look at earnings.  They're always the fuel for any rocket.  Here, they've been negative for the last 3 years, starting with minus 59 cents in 2009, then going further down to minus 84 cents.  Last year, they were better, but still in the red, to the tune of 42 cents.  This year, 2 analysts see earnings at 20 cents a share, then forecast 61 cents for 2013 (fiscal year ends August 31).  So if the earnings hit the 20 cents, it's trading at 41 times earnings.  Seems a little ambitious.  Of course, if the earnings get to 61 cents by 2013, that's only a P/E of 14, a much more digestible number.

Sales are ramping at Penford.  In the second quarter (finished in February), revenues were up 16% with Food Ingredients showing best results (it's 29% of total sales).  High demand for bakery products, pet treats and gluten free items should continue for the rest of the year, especially the gluten free products since there's an ever increasing awareness of certain allergies some people have to gluten.  The Industrial Ingredients group also saw strong demand with better orders for specialty starches and higher processing fees.  The only bad news: lower ethanol sales because of plant shutdowns, maintenance and lower margins.

With all the good growth in sales, the bottom line still suffered.  The company posted a loss of 3 cents for the quarter, below the analysts' expectations of a positive penny.  That's the fourth quarter in a row the company has fallen short of analysts' predictions.

For second quarter of last year, analysts had 4 cents, the company produced minus 13 cents.  For the third quarter, analysts predicted 10 cents, the company showed minus 6 cents.  For the fourth quarter, it was 6 cents from the analysts with the company delivering minus 26 cents.  Then again, as mentioned above,  the shortfall in the first quarter of this year.  Despite these disappointments, the stock gained significantly.

Part of the reason is from the company's expansion.  In January it bought Carolina Food Starches.  There's also a good budget for Research & Development, especially in the bio-product arena.  Another area of interest: clean fuel technology, especially if oil and gas prices head higher.  Other products in the lab: bio-latex for coated paper and packaging industries.  The distinguishing feature: the food packaging is disposable and has a minimal carbon footprint.

- Essential Numbers:
- Price to sales ratio: .27
- Price to book: 1.09
- Operating margin: 2.02%
- Profit margin: - 1.05%
- Return on equity: - 4.40%
- Return on assets: 2.01%
- Total revenues last 12 months: $346.8 million
- Total cash: $595,000
- Cash per share: 5 cents
- Total debt: $78.38 million
- Total debt/equity: 92.15%
- Current ratio: 2.81
- Book value per share: $7.48
- Beta: .83
- 52 week change: 52.81%
- Shares outstanding: 11.36 million
- Float: 7.43 million
- Held by insiders: 22.7%
- Held by institutions: 53.4%
- There is no dividend.

There's a large insider ownership which is always a good indicator of management's commitment to the enterprise.  But with thin margins and missed expectations for the last year, this stock may reflect all the goodness you can find at the moment.  If the company can beat analysts' forecasts or even meet them, this stock could see higher numbers.  Maybe not as high as the $41.30 it reached in 2007, but better prices.

Of course, investors need to remember that in 2009, you could buy all you wanted at $2.10.  This one's only for the brave.

- Company Web site: www.penford.com

- Ted Allrich
June 14, 2012


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Ted Allrich is Chairman of the Board of BofI Holdings Inc. and Bank of Internet USA. He is also the Founder of The Online Investor (www.theonlineinvestor.com), a site that offers investment ideas and in

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