Grupo Bimbo Executing Where It Matters, But Consumer Habits Are Shifting

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It's been a small while since I've updated my thoughts connected Grupo Bimbo (OTCPK:GRBMF) (OTCPK:BMBOY) (BIMBOA.MX), but I'm pleased to opportunity that guidance has been executing good connected nan action items I noted successful my anterior articles, including further marque innovation, marketplace stock gains successful higher-value categories, and operating ratio improvements. At this point, nan scheme going guardant could simply beryllium "more of that, please" and I'd beryllium happy.

These shares are up much than 130% from my past article connected nan company, which is beautiful singular capacity comparative to nan group, arsenic good arsenic person peers for illustration Flowers (FLO), Hostess (TWNK), and Mondelez (MDLZ). The rumor now is simply that valuation - moreover pinch mid-single-digit gross maturation and further free rate travel separator improvement, nan champion I tin see connected valuation is possibly 10% near-term upside from here. That's not bad for a user staple, but I wouldn't expect nan aforesaid benignant of returns seen complete nan past mates of years.

On Target Results, But Some Margin Pressures Remain Evident

Bimbo's 4th fourth was good - a mini gross miss connected forex isn't a large woody and nan institution met expectations for EBITDA, pinch a patient guideline for some gross and EBITDA for 2023, albeit pinch higher capex arsenic well.

Revenue roseate 15% twelvemonth complete twelvemonth and 6% 4th complete 4th arsenic reported. Sales successful Mexico were up 17% yoy and 4% qoq, while nan U.S. and Canada was up 16% yoy (up 22% successful section currency) and 9% qoq. These 2 segments comprise astir 85% of nan business, truthful they'll mostly beryllium my focus.

Gross separator declined 120bp yoy, pinch Mexico down 40bp to 53.7% and North America down 190bp to 52.3%. Higher input costs (including beautiful robust harvest prices) drove that result, and nan institution is seeing comparatively little pricing leverage successful caller months arsenic request elasticity increases.

Adjusted EBITDA roseate 12% yoy and 1% qoq, pinch separator down 40bp yoy and 70bp qoq to 13.4%. EBITDA successful nan Mexican operations fell 3% yoy and 5% qoq, pinch separator down 370bp yoy to 17.4%, while North American results improved 14% yoy and 3% qoq, pinch separator down 10bp to 11.1%. Both nan LatAm and European operations proceed to beryllium margin-dilutive, pinch EBTIDA margins of 9% (up 290bp) successful LatAm and 8.4% (down 60bp) successful Europe.

Pricing And Availability Is Driving More Private Label Share Growth

One of nan less-positive trends astatine Bimbo lately is weakening marketplace stock information arsenic per nan monthly Nielsen reports. Bimbo's wide income were up 10% successful January (versus 11% manufacture growth), pursuing 16.7% maturation successful December, 15.4% maturation successful November, 16.3% maturation successful October, and 17.6% maturation successful September. Over nan aforesaid clip play (September to January), year-over-year measurement has gone from level to down 8%, arsenic nan customer behaviour is becoming progressively elastic arsenic precocious prices persist.

In nan breadstuff category, for instance, measurement was down 10% for Bimbo against a 6% manufacture decline, while saccharine snacks measurement was down 11% versus manufacture measurement was down astir 2%. The bully news, if you tin telephone it that, is that these losses are coming mostly to nan use of backstage label. I judge customers are trading down wherever they tin to prevention money fixed important nutrient costs inflation, but I besides judge immoderate of this move has been powered by improved readiness - for immoderate time, galore producers mostly curtailed their backstage explanation accumulation arsenic they couldn't fulfill request for their ain brands, but that business has started to normalize, truthful customers erstwhile again person more/better backstage explanation options.

There are 2 valid ways to look astatine this. In nan short term, this is decidedly a consequence to Bimbo's momentum successful North America, but it's not really benefiting Flowers, Hostess, Mondelez aliases different rivals. Longer term, though, nan institution has been gaining stock crossed astir of its categories, and peculiarly successful higher-value categories for illustration specialty breads, saccharine snacks, and salty snacks. That, successful turn, has helped margins.

Can Operational Improvements Still Drive Leverage?

I've been impressed pinch what Bimbo has achieved successful its U.S. operations complete nan past respective years. In 2016, nan North American operations were producing sub-10% EBITDA margins, but person since improved to nan 11%-12% range.

There person been aggregate drivers here. Increased income of premium products person helped, arsenic has a portfolio pruning process that eliminated little celebrated items. That has helped maximize capacity utilization for higher-value products, and nan institution has besides done a batch of activity connected works ratio (automation, et al) and logistics improvement. By consolidating income centers and reconfiguring transportation routes, Bimbo has reduced quiet miles and amended leveraged its existing structure.

I deliberation location is still room for improvement, astatine some nan plant-level and successful nan logistics system, but I deliberation further advancement will beryllium much incremental. I besides spot room for betterment crossed nan European and Latin American operations, but standard will beryllium a limiting facet successful galore markets, and Bimbo whitethorn person to hold for customer behaviors to alteration (favoring branded packaged products complete nan products of nan section bakery).

As acold arsenic scale-versus-efficiency goes, however, I propose investors support their expectations successful check. Bimbo has ever been highly acquisitive and consenting to scheme connected agelong timelines - waiting years for markets and marketplace opportunities to develop. While nan institution has shown immoderate willingness of precocious to exit sub-scale businesses (selling Ricolino to Mondelez), don't expect guidance to commencement looking for under-earning operations successful Europe aliases LatAm to put up for sale, aliases astatine slightest not successful ample numbers.

The Outlook

Bimbo has outperformed my expectations connected merchandise development, and nan institution has surely gotten a boost from pricing leverage. With beardown momentum successful specialty categories wrong breads and snack products, I'm comfortable pinch a semipermanent gross maturation complaint person to 4%. On nan separator side, I expect betterment complete clip toward nan mid-to-high single-digits, driving precocious single-digit adjusted FCF growth.

Between discounted rate travel and margin/return-driven EV/EBIITDA, I deliberation Bimbo is apt nary much than 10% undervalued successful nan adjacent word and apt priced for a precocious single-digit semipermanent annualized return. That's arguably not bad for an established user staples company, and I suppose location is upside to outperform connected revenue.

The Bottom Line

I liked Bimbo earlier and I still for illustration it now, though nan stock value capacity and valuation make it a much marginal telephone for me. Given accrued elasticity successful user habits and higher Street expectations, this is simply a sanction I'd alternatively effort to prime up again astatine little levels.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

Stephen Simpson is simply a freelance financial writer and investor. Spent adjacent to 15 years connected nan Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That past portion isn't wholly true. Probably.