Description

SunOpta is a commodity fruit and plant milk producer benefiting from excitement around oat milk.  The stock spiked and is returning to a lower level, as it tends to do historically after investors get burned by management's hype and remember that this is a terrible business.

Let's start on oat milk, which is growing quickly and is the main source of investor excitement.  Making oat milk is easy-- oats, water, and a blender.  You can do it at home if you want, at a fraction of the cost of packaged oat milk.  Their largest customer is Starbucks, which has been pushing oat milk, and STKL has been building the capacity for them as well as Planet Oat, owned by Hood.

Per the Chobani S-1, oat milk market size in 2021 was $370M at retail.  It has grown since then, mostly through pricing.  Back of the envelope, assuming that oat milk was $3/half gallon in 2021 (and $4 now), then this was around 240M liters.  STKL is building a new plant in Fort Worth.  Oatly/Ya Ya are also building a new plant in Fort Worth.  The combined capacities of these plants are 300M liters.  Even assuming strong volume demand growth since 2021, the impact on supply will be massive and should tip the market into oversupplied.  Since oat milk was 18% of the plant-based category in 2021 (per Chobani), it is likely 25-30% now, implying that share gains may be tougher to come by.

Last quarter, OTLY reported 7% volume growth.  Assuming STKL saw the same pricing growth as OTLY (30%), then their volumes grew 3%.  Overall Q1 revenues and EBIT were down for STKL in Q1.  I don't think it's crazy to say that increasing market supply >50% into flattish volume trends will lead to pricing pressure, and it seems likely that revenue growth could/should be negative for this segment over the next 12 months.  OTLY is still a customer of STKL, and will in-source that production, which is an additional headwind.  Additionally, oat prices have mean-regressed after a sharp spike, and as OTLY is paid a processing fee with oats as a pass-through cost, this should also pressure the topline.  

And what if oat milk is a true fad?  This seems possible to me-- after all, it doesn't taste that great.  A weak consumer might balk at paying $1 upcharges on their lattes, or another trendy plant might be blended into a new "milk".  We might already be there: https://www.theguardian.com/food/2023/may/10/oat-milk-almond-soy-plant-dairy-price and https://www.eater.com/23389111/oat-milk-oatly-popularity-rise-and-fall-environmental-health-concerns.

Outside of oat milk, STKL has other PBMs (almond, coconut), broths, frozen fruits, and fruit-based snacks (think, fruit roll-ups).  These are all commodity categories, and most are shrinking.  Snacks are growing, and honestly I'm not really sure how.  Is demand for fruit roll-ups really increasing?  This seems like another category that is likely to plateau soon.  The overall fruit segment shrank 10% in Q1, though they claim that the snacks portion is still growing; this is likely all price, though.

So, where should this trade?  Considering it consistently prints ROIC < 3%, it should trade at a discount to its invested capital of $750M.  This implies an equity value of $420M, or around $3.50 per share, 50% lower.  Note that management would have you value the business on adjusted EBITDA which a) adjusts out new expenses basically every quarter and b) ignores depreciation for what is a capital-intensive manufacturing business.  When segments start to underperform, as they always do, they are sold for a discount-- STKL recently liquidated its sunflower seed business for 25% of revenues and 50% of book value, and they seem to have just shut down part of their broth business with no buyers in sight.    

Catalyst

pricing pressure from capacity expansion and raw material normalization

consumer demand steady or dropping due to economic pressures

high leverage produces consistently negative earnings