By Glen S. Woods
Stevia, the zero calorie natural sugar substitute, continues to grow in popularity. According to Packaged Facts of the U.S, the 2011 world stevia market, retail and wholesale, was somewhere between $800 million and $2 billion. While that is a spread of $1.2 billion, if one realizes that in 2008 stevia sales were a mere $20 million, taking the lower estimate of $800 million, that is quite a rise in sales. The rise can be attributed to stevia entering the lucrative mainstream U.S. market in December 2008, when the U.S. Food and Drug Administration (FDA) approved the use of stevia as a zero calorie sugar substitute. Three years later the EU followed suit approving stevia, and within a year Europe surpassed China to become the third largest market for stevia behind the U.S. and Japan. Countries approving the use of stevia continue to grow as last November Health Canada approved the sweet extract, with India and Thailand expected to follow with approvals soon.
Stevia is clearly a growing commodity; according to The World Health Organization it could eventually replace 20% to 30% of all dietary sweeteners. Considering that the total global sweetener market in 2010 was estimated to be $58.3 billion, stevia has the possibility of one day being an $11.6 billion to $17.4 billion market. It is no wonder that food and beverage manufacturers are developing and testing a number of new zero calorie and low calorie products utilizing stevia. However, manufacturers and producers have also been leery of moving too fast in bringing stevia products to market. Most of the stevia today is grown on small farms in China, and developing a consistent supply line with quality stevia at a low price has been a concern to food and beverage manufacturers and stevia producers. However, there are companies that are growing new strains of stevia and developing new methods of extracting the sweet steviol glycosides that could address the concerns of the market. Below are companies of various sizes and risk tolerances that are positioning to be major suppliers of stevia, and might also sweeten investors’ wallets.
It is difficult to discuss stevia without including PureCircle Ltd. (LON:PURE, PINK:PCRTF), the world’s leading producer and marketer of stevia. PureCircle does not grow its own product, but has contracts with growers around the world, including South America, Africa, Asia, and recently the United States. Through its contracted farmers PureCircle has implemented a leaf breeding program with a goal to improve the quality and yield of the sweet steviol glycosides in the stevia leaves so the company can extract as much quality compound as possible. In doing so the company continues to develop a diverse variety of stevia plants that are bred to be the best suited for the various growing regions. In August PureCircle announced it received a Notice of Allowance from the U.S. Patent and Trademark Office for its patent application for a new high-yield variety of stevia, grown by PureCircle in several global markets, including Paraguay and Kenya.
Last year PureCircle made inroads in the U.S. market when it contracted with the S&W Seed Company (NASDAQ:SANW), a successful alfalfa grower in California’s Imperial Valley, to grow stevia for the company. Securing a grower in the U.S. was a wise move for PureCircle especially since it gives them a foothold in California’s central valley, one of the most fertile growing regions in the world; plus it opens the door to other growers in the state who wish to add stevia to their plant line. According to Grover Wickersham, S&W Seed’s chairman, “California’s famous for being able to grow pretty much anything as well or better than any other place in the world. We may not be able to compete with all the things that they make in China, but one area where California does compete, really effectively, is agriculture.”
In 2012 S&W Seed Company (SANW) harvested its first commercial crop of stevia on its 114-acre field in Chowchilla, and has planted a second generation field of approximately 150 additional acres using a selection of varieties that the company believes may have characteristics superior to those of the first generation. S&W Seed (SANW) is positioning itself to be a major grower in California as the company continues to add acreage to its already 11,000 acres, recently leasing another 114 acres in Calipatria in the Imperial Valley. The added acreage is needed to meet the company goal of 10 million pounds of seeds annually. The company expects its stevia revenue to grow in fiscal 2013 and fiscal 2014, but to remain a small portion of its total revenue for the foreseeable future.
S&W Seed, which has a market cap of $70.62 million, announced revenues in the second quarter of $13.7 million, up 189% from $4.7 million in the comparable period of the previous year. S&W Seed is a growing company, and with its entry into the stevia market, I believe over time it will only enhance the company’s bottom line. The stock closed on Wednesday February 27th at $8.77 per share, just shy of its 52-week high. However, the company has been aggressive recently as seen with its 54% growth on its core seed and crop revenues plus acquiring Imperial Valley Seeds last October, which in part helped the company’s rise in revenue. I like S&W Seed Company (SANW), and how the company continues to grow, and I wouldn’t be surprised to see the stock continue to rise.
Another California company looking to compete in the stevia market is an early-stage agribusiness also based in the central valley, Stevia First Corp. (PINK:STVF). On February 25th STVF updated its interim results detailing key aspects of its previously announced and current ongoing field trials. As of January 1st 2013 the results have demonstrated a 100% plant survival rate, and according to STVF’s data an approximate 20% increase in growth due to mulch vs. conventional bedding. STVF’s report was able to demonstrate regional suitability for growing stevia as a perennial crop, which does not die out each year, as opposed to an annual crop that would require yearly replanting. According to the report the data offers important economic implications as much of the domestic stevia production is currently grown in greenhouses and is subsequently transplanted at significant cost. Further testing results are expected in the spring when the total winter survival is assessed and late summer when annual yield is assessed.
While these field trials show positive results, what interested me about Stevia First (STVF) was its other method the company was testing and developing to produce high-grade steviol glycosides on an industrial level. This method is a yeast fermentation-based process the company licensed from Canada’s Vineland Research and Innovation Centre. Today the extraction and purification of the stevia account for about 70% of the production costs. This fermentation process has shown to convert low-cost plant materials into sweet steviol glycosides, which means the process to produce the steviol glycosides may not require actual stevia leaf, thus lowering the cost considerably. If this process proves successful, once operational the fermentation process will be able ensure a consistent supply of stevia that is not dependent on weather or soil conditions, which means it could be utilized anywhere – even on a golf course. Plus the process should produce a consistent tasting stevia from batch to batch, and develop the sweeter characteristics from the strains of steviol glycosides while removing the less desirable characteristics still found in many stevia plants grown around the world.
Stevia First (STVF) CEO, Robert Brooke, commented in the briefing from February 25th, ”Given the excitement around fermentation-based stevia production, our farming research is quite significant as a complement to those efforts. Fermentation, compared to traditional industry practices, may potentially use all the steviol glycosides found within the leaf, rather than just the Reb A, so we can potentially increase extract production efficiency. This is big news for local growers as well, and we remain committed to introducing stevia and further developing domestic cultivation, harvest, and extraction methods.” As discussed earlier in the article, food and beverage manufacturers are leery of moving too fast in bringing many stevia products to market due to concerns of a consistent supply line of quality stevia at a low price. STVF’s fermentation method, which they are targeting to be operational, with the first revenues from sales sometime in 2014, would have the ability for the company to bring to market a consistent supply of high quality stevia at a much lower price than farm-grown stevia.
Stevia First (STVF) is a small company with market cap of just under $28 million, but it is developing the fastest growing sweetener on the market. On Wednesday February 27th the stock closed at $0.50 per share. I am encouraged that the company not only has moved to the actual testing stages of its product, but sees the tests as favorable. I see the company has an excellent opportunity for growth this year, and if the next round of tests proves successful I can see the stock rising higher. Stevia First (STVF) is still an early stage development company, which has yet to bring its product to market, and therefore is a highly risky investment; I do like the long-term outlook on the stock, and I think at $0.50 it may be a bargain.
The $4.9 Billion market cap corn refiner Ingredion Inc. (NYSE:INGR), formally Corn Products International, jumped on the stevia bandwagon with Enliten, a patented stevia strain that the company says has minimized the bitter licorice tasting stevioside and maximized the sweet tasting Reb A, giving the product a superior quality and taste. I see entering the stevia market as a smart move for Ingredion to add to its product line of sweeteners. The sweetener industry is well aware of the negative press both sugar and high fructose corn syrup has attracted, and many of these companies have already partnered up with stevia producers to develop sugar stevia blends.
I like Ingredion, the company conducts business in over 40 countries, and serves approximately 60 diverse sectors in food, beverage, brewing, and pharmaceuticals. Chairman and CEO, Ilene Gordon, commented on the company’s future to broaden its business. “We’re now looking at Asia and Eastern Europe for geographic expansion as well as looking at broadening our portfolio for other ingredients that will make us more important to our customers. We’re looking for the right value proposition.”
I am a little surprised that Ingredion’s stock hasn’t moved much this year, up only 1.25% YTD. The company showed earnings rose 17% in the fourth quarter to $111.6 million, or $1.42 per share on sales of $1.64 billion, compared to $95.1 million, or $1.22 per share, in the fourth quarter 2011 on sales of $1.55 billion. In 2012 company earnings were up nearly 3% to $427.5 million, or $5.47 per share on sales of $6.53 billion, compared to $415.7 million, or $5.32 per share, on sales of $6.22 billion in 2011. I think Ingredion is an undervalued company; its P/E ratio is a modest 11.91. Zacks upgraded the stock from a “neutral” to an “outperform” rating with a target price of $71.30 per share. Analysts at Citigroup downgraded shares from a “buy” rating to a “neutral” lowering its price target to $77.00, still well above where it sits today at $65.67 per share. Ingredion might not be an exciting company, but I think it is a solid company to have in one’s long term portfolio.
Stevia continues to gain acceptance around the globe, and growers and producers continue to develop better and sweeter strains of stevia. Whether it’s via crossbreeding or through a fermentation process, stevia has gained a foothold in the sweetener market. I see is plenty of room for the sweet product to grow and a wonderful investment opportunity in many of the stevia companies. Due to its size and diversification, Ingredion is by far the safest of the companies to invest in. However, for a higher risk/reward, I would look at S&W Seed Company (SANW) or Stevia First Corp. (STVF).