Ingredion

Ingredion's second-quarter earnings reflected the impact of lower production at a key US plant as lower volumes and higher unit costs weighed on profits.

Why it matters: Ingredion shares were up 3% at the time of writing on Aug. 4 as the market reacted to management's comments that the US plant was back up and running at normal production by the end of June. This supports our view that the impact on profits would be temporary. The specialty ingredient-focused texture and healthful solutions segment generated revenue growth and margin expansion, driven by higher volumes, which led management to raise its segment guidance for 2026. This aligns with our forecast that the TH&S segment will drive companywide profit growth.

The bottom line: We maintain our $150 fair value estimate for narrow-moat Ingredion. We slightly raised our near-term TH&S forecast, partially offset by a slightly lower profit forecast in the food and industrial business as a result of the US plant outage. These changes largely offset one another. Ingredion's planned acquisition of Tate & Lyle remains on track to close by the end of 2027. We view the deal as value-accretive for Ingredion shareholders as we think Ingredion is making the acquisition at a good price. At current prices, we view Ingredion shares as significantly undervalued, with the stock trading in 4-star territory and more than 30% below our fair value estimate. For long-term investors, we see upside in shares as we expect the Tate & Lyle acquisition will boost long-term profit growth.

We raise our Ingredion fair value estimate to $150 per share from $140 following the company's announcement that it plans to acquire Tate & Lyle in an all-cash deal for GBX 595 per share. We view the deal as value-accretive; it includes annual cost-saving synergies of $130 million, which we think is reasonable at less than 1.5% of revenue for the combined company. The deal is subject to a Tate & Lyle shareholder vote, in accordance with a court-sanctioned scheme, as well as regulatory approvals. While some divestitures could be required, we think the deal will largely close as proposed in 2027. Our weighted average cost of capital is around 8%.

We forecast that specialty ingredients in the texture and healthful solutions segment will see mid-single-digit revenue growth and margin expansion over our five-year forecast period as these specialty ingredients command pricing power and higher margins.

In the two food and industrial segments, we forecast low-single-digit annual revenue and margins to remain fairly flat versus 2025 levels. While we see some growth in end markets such as packaging and brewing, we also see a decline in high-fructose corn syrup, which accounts for around 8% of total sales, especially in the US, as demand falls and Ingredion reduces production volume.

We forecast the other segment will turn profitable in 2026 and see profit growth thereafter.

Since 2010, none of Ingredion’s reporting segments has posted even a single quarter of operating losses, despite geopolitical disruptions in some key markets outside the US. Further, the North American business maintained double-digit margins after the North American corn drought in 2012. These achievements represent the company's impressive earnings stability as well as the impact of Ingredion’s North American corn input cost hedging strategy.

In a downside scenario where Ingredion's specialty ingredients do not gain as much traction, we assume revenue would be slightly down. Operating margins would fall to around 12% at midcycle levels. We also assume the Tate & Lyle acquisition is value-destructive as cost-saving synergies are not fully executed. In this scenario, our fair value estimate would be $80 per share.

In an upside scenario where Ingredion's specialty ingredients gain market share due to increased customer adoption, we expect revenue to grow in the midsingle digits. Operating margins would expand to nearly 17% at midcycle levels. We also assume that the Tate & Lyle acquisition adds more value versus our base case as management is able to generate a higher growth rate for both businesses after the acquisition. In this scenario, our fair value estimate would be $200 per share.

We assign Ingredion a narrow Morningstar Economic Moat Rating. For ingredient producers to have a moat, we generally look for evidence of intangible assets and customer switching costs, which tend to work together to drive pricing power. Ingredion’s products can be separated into two categories: specialty and core ingredients. In our view, the specialty ingredients business benefits from intangible assets and customer switching costs that generate pricing power and drive positive economic profits.

We believe that Ingredion’s intangible assets are rooted in its proprietary, differentiated specialty ingredients products, which are often priced 2-3 times higher than comparable commodity ingredients. These products are primarily in the texture and healthful solutions segment, which generated roughly a third of profits in 2025. Management is investing heavily to expand its specialty ingredients business and expects these specialty products to generate nearly 40% of profits by 2029.

Ingredion’s specialty ingredients sit in two key product categories: texturizers and sugar-alternative natural sweeteners. Ingredion is a global leader in texturizers, its largest specialty ingredient category. These ingredients are crucial to the feel of a food product as it is being consumed. The US National Library of Medicine’s food and science research has cited texture as the second most important factor that affects consumer food and beverage purchase decisions, after flavor. This makes Ingredion a crucial supplier to its food and beverage customers.

The remainder of Ingredion’s specialty ingredients portfolio aims to capitalize on shifting consumer preferences, such as the desire for lower-sugar products. Ingredion is well positioned to benefit from this trend as a global leader in stevia and allulose. These are two natural sweeteners that are increasingly capturing share from sugar and traditional sweeteners, such as high-fructose corn syrup. This change in consumer preference is expected to drive demand for these specialty products.

Ingredion’s research and development spending supports the company’s intangible assets. At present, Ingredion boasts 1,800 patents globally, far more than narrow-moat Tate & Lyle’s 500. While a strong patent portfolio is one indication of intangible assets, we also look at research and development investment as an indication of a company’s ability to maintain its differentiated portfolio. Here, Ingredion tends to spend less relative to wide-moat ingredients companies, which spend 4%-8% of sales on R&D; it spends just 2% of specialty sales. However, the company has historically pursued small, tuck-in acquisitions to add new products to its portfolio, then used R&D to enhance them after acquisition, rather than developing new products internally. Regardless, we think the company is investing enough to maintain its pricing power.

Ingredion’s intangible assets enable the company to secure ingredients for new food and beverage products. Once they are in, strong switching costs take hold. After a new food or beverage is introduced, consumer packaged goods companies rarely, if ever, replace key ingredients, such as texturizers or natural sweeteners, because the replacement ingredient could change the product's taste or texture profile and turn consumers away. This dynamic provides Ingredion with pricing power. For example, Ingredion raised prices to fully pass along inflation costs when crop prices and other raw materials costs hit multiyear highs in 2022.

The food and industrial segments generally do not command pricing power for Ingredion. However, they are not value-destructive, either. The business turns corn and other crops, such as tapioca and potatoes, primarily into commodity-level starches and sweeteners, with limited differentiation from competitors’ products. For core ingredients sold to large consumer packaged goods companies (which is roughly half of F&I sales), Ingredion uses a cost-plus pricing model. This model guarantees the company a profit, and we estimate this generates a return on invested capital in line with Ingredion’s weighted average cost of capital. For the other half of these ingredients, Ingredion implements a corn hedging strategy to protect the company from corn price volatility. In practice, this replicates the cost-plus structure of the core business, locking in a profit regardless of the direction of corn price movements. As a result, Ingredion has turned a profit every quarter and every year for the past decade—even in 2012, when a severe drought greatly affected corn production and sent corn prices skyrocketing.

The excess returns from the specialty business have resulted in Ingredion generating positive economic profits every year, even during volatile periods such as the covid pandemic. Over the trailing 10-year period, Ingredion’s ROIC has averaged in the midteens, well above our 8.0% calculated WACC. We are confident that Ingredion will generate excess ROICs for at least the next decade.

Ingredion benefits from its growing proportion of specialty ingredients, which carry some degree of pricing power and generate higher profit margins.

Through its investment in specialty texturizers and natural non-corn-based sweeteners, Ingredion is well-positioned to capture growth from changing consumer preferences.

Management has a strong record of managing growth and acquisitions and returning cash to shareholders.

High-fructose corn syrup (roughly 8% of sales) has been linked with obesity and diabetes and is in declining use as a beverage sweetener.

Outside the US, Ingredion’s profitability is subject to fluctuating input prices for corn and other starch raw materials.

Sugar alternatives, including stevia and allulose, will become commoditized over time, leading to lower profits.