Over the last six months, SunOpta’s shares have sunk to $6.65, producing a disappointing 11.7% loss - a stark contrast to the S&P 500’s 5.8% gain. This may have investors wondering how to approach the situation.
Is now the time to buy SunOpta, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is SunOpta Not Exciting?
Despite the more favorable entry price, we're cautious about SunOpta. Here are three reasons why you should be careful with STKL and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. SunOpta’s demand was weak over the last three years as its sales fell at a 4.2% annual rate. This was below our standards and signals it’s a lower quality business.
2. Fewer Distribution Channels Limit its Ceiling
With $742.7 million in revenue over the past 12 months, SunOpta is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers.
3. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products, has a stronger brand, and commands pricing power.
SunOpta has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 16% gross margin over the last two years. Said differently, for every $100 in revenue, a chunky $83.96 went towards paying for raw materials, production of goods, transportation, and distribution.
Final Judgment
SunOpta isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 32.5× forward P/E (or $6.65 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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