By Marc Johnson, Investment Reporter

 

Winnipeg-based Viterra Inc. (Toronto: VT) is one of the food stocks that we regularly examine. We've upgraded this grain handling and marketing, agriproducts, and processing company to a buy.

Viterra is becoming increasingly profitable, yet it's cheap. It is suitable for long-term gains and attractive dividends that may rise further.

 

In fiscal 2011 ended October 31, we calculate that Viterra earned a record $274 million, or 74 cents a share. This excludes one-time costs for the impairment of goodwill, for integration expenses, and for losses on the disposal of assets. This was up sharply from $144 million, or 39 cents a share, the year before.

 

Sales rose more than regular costs. Earnings grew at all three of Viterra's divisions.

 

Viterra's sales jumped by 42.8% to $11.8 billion in fiscal 2011. The higher sales reflected several factors: Higher sales from Viterra's three divisions, capital investment, and acquisitions.

 

Why did revenue rise so sharply?
Viterra's 2011 grain handling and marketing revenue shot up by 50% to $8.5 billion. It profited with much higher grain shipments from Australia, better grain shipments from North America, and a 13% rise in the global pipeline profit margin.

 

Viterra's 2011 agriproducts revenue rose by over 32% to $2.4 billion. Simply, it sold more fertilizer at higher prices. Finally, the company's 2011 processing revenue climbed by over 39% to $1.8 billion.

Viterra's revenue rose thanks to net capital spending of $202 million on new projects, such as a malt facility in Australia and a canola crushing plant in China. Also, acquisitions of $7.8 million for new pasta and oats businesses raised the revenue.

 

All regular costs (including financing expenses) rose by 41.4% to $11.4 billion. As this was below the rise in revenue, Viterra's earnings improved. The better profit is confirmed by a 37.6% rise in Viterra's 2011 cash flow to $497 million. This easily exceeded the net capital spending and acquisitions, as well as dividend payments of $37.2 million and intangible asset investment of $25.7 million.

 

Partly due to the much higher cash flow, Viterra's net debt-to-cash flow ratio is a safe 1.8 times. This also enabled the company to raise its dividend by 50%, to 30 cents a share. It now yields an attractive 2.9%.

 

In fiscal 2012, we expect Viterra to earn a higher 80 cents a share. Despite these improving results, the stock trades below its book value of $10.86 a share (daily trading volume is relatively low). Viterra is optimistic about its outlook.

 

When the Canadian Wheat Board's monopoly on the marketing of crops ends on August 1, Viterra expects to profit from higher volumes and "optimizing its operations efficiencies." It adds that "Strong fundamentals are expected to hold for global grain commodity markets." And it foresees "positive harvest conditions in both South Australia and Western Canada."

 

And Viterra's global agri-business has extensive operations across Canada (30.2% of 2011 revenue), the United States (10.4% of revenue), Australia (10.5% of revenue), and New Zealand (3.3% of revenue). Viterra also has offices in major consuming countries, such as Japan, Singapore, China, Vietnam, India, Switzerland, Italy, Ukraine, Germany, and Spain. 

Europe accounted for 8.7% of the revenue, Asia for 31.4%, and all other regions as a group for 5.6%.

 

This global diversification reduces Viterra's exposure to problems in any one area. For instance, the company did well despite floods in parts of Western Canada last year.

 

Subscribe to Investment Reporter here…

 

Related Reading:

• Vale Can't Catch a Break
• 2 Miners Headed South to Move North
• Canada Has What the World Wants