KeyBanc-Aug-29-2013.pdf

August 29, 2013 KeyBanc
Equity Research Capital￿Markets
Afternoon Call Summary

Important disclosures for the companies mentioned in this report can
be found at https://key2.bluematrix.com/sellside/Disclosures.action.
Please refer to the analysts' recently published reports for company-specific valuation
and risks.
FOR FURTHER INFORMATION,
PLEASE CONTACT ANDREW
DEANGELIS AT 216.689.3649
Rating Changes: Upgrades
Ticker Company Old Rating New Rating
INGR Ingredion, Inc.HOLD BUY
Price Target Changes: Decreases
Ticker Company Old Price Target New Price Target
AEP American Electric Power Company, Inc.$51.50 $48.00
ALE ALLETE, Inc.$55.00 $51.00
CMS CMS Energy Corporation $30.00 $28.50
CNL Cleco Corporation $49.00 $48.00
IDA IDACORP, Inc.$55.00 $51.50
NEE NextEra Energy, Inc.$88.00 $84.50
NI NiSource, Inc.$32.00 $31.00
Price Target Changes: Increases
Ticker Company Old Price Target New Price Target
SYRG Synergy Resources Corporation $8.50 $10.00
Estimate Changes: Increases
Ticker Old 2013E New 2013E Old 2014E New 2014E Old 2015E New 2015E
INGR 5.30 5.30 5.85 6.15 ----
SYRG 0.21 0.21 0.34 0.36 ----
August 29, 2013 Afternoon Call Summary
Page 2
INDUSTRIAL: DY: Final Takeaways from Fiscal 4Q Earnings — Afzal 3
ENERGY: SYRG: Executes Another Bolt-On — Aydin 5
INDUSTRIAL: Key Quarterly Log Book – Updated Less-than-Truckload Trends — Fowler 7
ENERGY: Utilities: Rate Volatility Impacting Utilities: Price Target Updates — Ridzon 8
CONSUMER: INGR:Upgrading to BUY on Optimistic Outlook for N.A.;HFCS Fears Appear Overdone —
Jagdale 10
KeyBanc Capital Markets Inc. Disclosures and Certifications 14
August 29, 2013 Afternoon Call Summary
Page 3
INDUSTRIAL: Dycom Industries, Inc. (DY) — Tahira Afzal [phone] [e-mail], Saagar Parikh
[phone] [e-mail]
HOLD, Price Target: NA
2014: $1.49 from $1.49, 2015: $1.81 from --
We are maintaining our HOLD rating on Dycom Industries, Inc. (DY-NYSE) after the firm’s fiscal 4Q13 earnings. We
view the firm’s fiscal 4Q13 results as intact with our expectations, and in line with the macro trends previously
guided to by management. Thus, we have maintained our FY14 EPS estimate at $1.49, while we are initiating our
FY15 EPS estimate at $1.81 – the prior implies 26.9% year-over-year EPS growth, while the latter implies 21.9% EPS
growth. We continue to remain on the sidelines as we feel DY’s 25% year-to-date share performance (vs. 14.62% for
the S&P 500 year-to-date) properly factors in better than expected wireless opportunities and intact wireline work
– we await greater signs of the impending housing recovery effect and/or a better risk/reward entry point to get
more constructive. Our key takeaways are as follows: 1) Book-to-Bill Robust at 1.4x; Shows Strength of Legacy
Operations – we positively view DY’s 1.4x book-to-bill, which compares to an average of 0.8x in the past six fiscal
4Qs, as it provides credence to our belief that DY’s legacy operations are performing ahead of our expectations
in CY13 – the outperformance is partially being weighed down by headwinds from the wind-down of broadband
stimulus work. We gauge the solid book-to-bill performance provides adequate support to our organic top-line
estimates of 7.0% in FY14 and 8.1% in FY15; 2) U.S. Housing Recovery an Important Direct & Indirect Catalyst – We
continue to view a recovery in the U.S. housing market in CY13/CY14 as an important upside earnings driver for
DY, as housing strength should lead to increased sponsor capital spending for network deployment to existing and
new household formations. We have reflected some benefit from the uptick in U.S. housing in calendar 2H13 and
calendar 1H14, but now believe a greater direct and indirect impact on DY will be later than our initial expectations;
3) Wireless Operations Provide Significant Growth Potential – DY indicated its wireless operations continue to run
at a $50 million quarterly clip, which implies a roughly $200 million annual run-rate; this compares to our initial
expectation of $100 million. We gauge the potential for significant double-digit wireless growth in FY14/FY15, as we
continue to see robust activity on the wireless front from AT&T, Sprint and T-Mobile, and view DY as well positioned
to obtain additional market share/scope.
Rating HOLD
Price $24.77
12-Mo. Price Target NA
Market Cap $844.7
Trading Volume 173
Revenues(mm)$1,608.6
2015E $1.81
2015 P/E 13.7x
2014E $1.49
2014 P/E 16.6x
2013A $1.17
Book Value/Share $12.10
Next Quarter October
Next Quarter E $0.46
FC Mean Quarter $0.47
FC Mean 2015E $1.94
FC Mean 2014E $1.48
Yield 0.0%
Maintaining Our FY14 EPS Estimate, Initiating Our FY15 EPS Estimate – We are maintaining our FY14 EPS estimate
of $1.49, while we are initiating our FY15 EPS estimate of $1.81. Our FY15 estimate assumes 8.1% organic top-line growth
and 21.9% EPS growth year-over-year.
EARNINGS RECAP
Dycom Industries, Inc. (DY-NYSE) reported fiscal 4Q13 GAAP EPS of $0.43 and non-GAAP EPS of $0.44 - the latter came
in line with our estimate of $0.44, while coming a penny below consensus of $0.45. The relatively in line quarter was led by
healthy organic top-line growth of 7.5%. In comparison to our estimate, the top line beat, while gross margins came a bit below
our expectations. As importantly, DY announced fiscal 1Q14 EPS and top-line targets of $0.42-$0.49 and $475.0 million-
$495.0 million, respectively. The targets encompass consensus EPS expectations of $0.47, while coming above expectations
on top-line growth. In addition, although management did not provide a full-year outlook, we gauge the midpoint of the fiscal
1Q14 outlook puts the firm on track to meet our FY14 EPS estimate of $1.49 (consensus of $1.48). Further, in a separate
press release, DY announced a $40 million share repurchase re-authorization for the next 18 months.
VALUATION
DY is currently trading at a 15.0x FTM P/E on our FTM estimates, vs. its E&C specialty peer group’s comparable average
of 14.8x, respectively. DY trades at an EV/sales of 0.8x vs. its five-year average of 0.6x and range of 0.2-0.9x.
August 29, 2013 Afternoon Call Summary
Page 4
RISKS
l Vulnerable to Cyclical Economy
l Risk of Vendor Consolidation and/or Customers Taking Work In-House
l Dependence on Key Telco/Cable Providers for a Large Portion of Revenues
August 29, 2013 Afternoon Call Summary
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ENERGY: Synergy Resources Corporation (SYRG) — Jack N. Aydin [phone] [e-mail],
David Deckelbaum [phone] [e-mail], Chris Stevens [phone] [e-mail],
Robert Ferer [phone] [e-mail], Joshua Grasso [phone] [e-mail]
BUY, Price Target: $10.00 from $8.50
2013: $0.21 from $0.21, 2014: $0.36 from $0.34
Synergy Resources Corporation (SYRG-NYSE MKT) announced the purchase of 1,006 net acres in the Wattenberg
field with 200 BOED of associated production for a purchase price of $17.5 million ($13.1 million in cash and
$4.4 million in stock). The transaction metrics imply $3,877 per acre adjusting for production, which we value at
$68,000 per flowing BOED. We believe this is a very favorable acquisition for SYRG considering we assign a value of
$28,400 per acre in the core Wattenberg in our RNAV estimate of $10.00/share using our resource estimates for the
Niobrara and Codell. This bolt on increases SYRG’s core Wattenberg acreage +5% to nearly 18,000 acres and we
are increasing our fiscal 4Q13 production estimate 8.6% to 2,536 BOED. Following the recent $78.3 million equity
raise in June, we believe SYRG has ample liquidity to fund the purchase.
Management continues to demonstrate its value proposition and execute acreage additions that are meaningful to
SYRG shareholders in a play that has largely been leased up by larger peers. Impending well results from the five-
well Renfroe pad in the core Wattenberg, SYRG’s first operated Hz wells, should be another catalyst for shares. We
reiterate our BUY rating on SYRG and increase our price target to $10.00/share from $8.50/share.
Rating BUY
Price $8.73
12-Mo. Price Target $10.00
Market Cap $493.1
Trading Volume 488
Revenues(mm)$25.0
2014E $0.36
2014 P/E 24.3x
2013E $0.21
2013 P/E 41.6x
2012A $0.25
Book Value/Share $1.90
Next Quarter August
Next Quarter E $0.05
FC Mean Quarter $0.05
FC Mean 2014E $0.46
FC Mean 2013E $0.20
Yield 0.0%
Adjusting earnings and cash flow estimates. We are adjusting our FY13 and FY14 estimates to reflect the acquired
production.
FY13E: EPS unchanged at $0.21 (Consensus at $0.20); DCPS from $0.55 to $0.57 (Consensus at $0.55).
FY14E: EPS from $0.34 to $0.36 (Consensus at $0.46); DCPS from $0.99 to $1.03 (Consensus at $1.19).
VALUATION
On an EV/EBITDAX basis, SYRG trades at 14.0x and 7.8x our 2013/2014 estimates, vs. its peers’ average multiples of 8.5x
and 6.4x, respectively. On an EV/EBITDAX basis, our price target of $10.00 per share implies 16.2x and 8.9x our 2013 and
2014 estimates. At the current share price, SYRG trades at a 12.7% discount to our RNAV estimate of $10.00 per share vs.
its peers, which trade at a 16.2% discount. Given SYRG’s peer-leading production growth and exposure to downspacing and
multiple benches in the Wattenberg, we believe SYRG shares deserve a higher multiple over time as the Company provides
investors comfort with its successful horizontal well program and demonstrates the ability to execute on its business plan.
RISKS
E&P companies present a variety of investment risks inherent in the industry, including the failure to profitably build
production, reserves and infrastructure in a highly competitive environment that includes companies with greater financial
resources, technical skills and follow-through on its current strategy. Commodity prices, lack of service rig availability, dry
holes, mechanical failures and adverse weather conditions could all contribute to a potential failure to reach its stated goals.
Aside from the normal risk factors of an exploration and production company, SYRG is a “micro-cap” company that is largely
dependent on outside capital to grow. In addition, our production estimates (as well as our earnings and cash flow estimates)
could change substantially given a decrease in the number of wells being drilled by the Company, especially given the
Company’s small production base at this early stage of development, all of which could impede the stock from reaching
our price target.
August 29, 2013 Afternoon Call Summary
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More specific risks associated with SYRG include: 1) operational missteps in a transition to a horizontal development
program; 2) lack of drilling success on the Company’s northeast Colorado acreage; and 3) securing sources of funding as
the Company outspends cash flow to grow.
All of the above risk factors could impede the stock from reaching our price target
August 29, 2013 Afternoon Call Summary
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INDUSTRIAL: Trucking — Todd C. Fowler [phone] [e-mail], Ryan Cieslak [phone]
[e-mail]
Our Key Quarterly Log Book analyzes quarterly operating statistics for publicly-traded less-than-truckload carriers,
highlighting general trends within the group and our near-term expectations for covered companies.
2Q13 Recap: In general, 2Q13 less-than-truckload (LTL) operating metrics were relatively stable in a difficult operating
environment, though comparisons, mix, and operational headwinds at several carriers constrained year-over-year trends
in the aggregate. That said, tonnage (albeit modest) was slightly above our expectations and strengthened as the quarter
progressed, while pricing was stable, benefiting from industry discipline and initial benefits from early-summer general rate
increases. Combined with evidence of traction with growth and margin initiatives at several carriers, results in our view were
sufficient and signaled modest positive momentum on a sequential basis.
Key Trends:
l Tonnage increased a modest 0.6% year-over-year following a 1.7% decline in 1Q13.
l Revenue per hundredweight increased 0.9%, below +2.5% in 1Q13 and +3.3% in 2012, but partially reflecting mix.
l Margins declined for the second straight quarter, but were impacted by operational headwinds at select carriers.
l Incremental margins were a positive 21% compared to +30% levels in 2012 and 2011.
l Operating profit per shipment increased 6.0% year-over-year, but gains eased from +20% in recent quarters.
l Weight per shipment increased year-over-year for the 14th straight quarter and is now 8% above 2009 lows.
KBCM Outlook: Our due diligence indicates tonnage 3Q13 to-date is in line to slightly above seasonal expectations,
reflecting improved manufacturing activity and select share opportunities at several carriers. Combined with a stable
pricing and volume outlook in coming months, as well as traction with company-specific initiatives at several carriers, we
maintain a modestly favorable outlook, but remain selective at current valuations. Our top LTL idea remains BUY-rated Old
Dominion Freight Line, Inc. (ODFL-NASDAQ) given its growth and operational focus; we consider BUY-rated Roadrunner
Transportation Systems, Inc. (RRTS-NYSE) an asset-light provider benefiting from organic expansion, acquisitions and
improved density.
We provide a detailed comparison for each operating statistic in our complete report.
August 29, 2013 Afternoon Call Summary
Page 8
ENERGY: Electric Utilities / Multi-Utilities — Paul T. Ridzon [phone] [e-mail]
With interest rates rising over the course of the last month and investors’ reduced appetite for interest rate sensitive securities,
we are revisiting our price targets on some of our BUY-rated names after the recent pullback. As we still find value in these
names, we have decided to reduce our price targets as the multiples have compressed in this more volatile interest rate
environment.
Our current price targets on all of our BUY-rated stocks under coverage are outlined below.
Cur Prv Cur Prv FC FC Current EPS Previous EPS
Sym Rtg Rtg Target Target 2013 2014 2013 2014 2015 2013 2014 2015
AEP BUY BUY $48.00 $51.50 $3.14 $3.31 $3.10 $3.30 --$3.10 $3.30 --
ALE BUY BUY $51.00 $55.00 $2.71 $2.92 $2.75 $2.90 --$2.75 $2.90 --
CMS BUY BUY $28.50 $30.00 $1.65 $1.75 $1.65 $1.75 --$1.65 $1.75 --
CNL BUY BUY $48.00 $49.00 $2.51 $2.75 $2.55 $2.75 --$2.55 $2.75 --
IDA BUY BUY $51.50 $55.00 $3.50 $3.41 $3.50 $3.40 --$3.50 $3.40 --
NEE BUY BUY $84.50 $88.00 $4.95 $5.29 $4.95 $5.30 --$4.95 $5.30 --
NI BUY BUY $31.00 $32.00 $1.55 $1.68 $1.55 $1.65 --$1.55 $1.65 --
American Electric Power Company, Inc. (AEP-NYSE; BUY; $48.00 price target; $3.30 EPS 2014E) - Despite the recent
pullback in the stock, we remain buyers of the name as the Company has new rates in several jurisdictions, a recently
increased payout ratio and continues to grow earnings in a range of 4-6%. On its 2Q13 earnings call, AEP reaffirmed 2013
and 2014 guidance ranges of $3.05-$3.25 and $3.15-$3.45 per share, respectively. With a 60-70% payout ratio, we believe
there is significant upside potential in the name as many of the risks are already factored in. We believe AEP offers investment
opportunity on generally reasonable regulatory environments and offers upside in a tightening commodity market. We have
decreased our price target to $48.00 from $51.50 per share. Our valuation is based upon a modest discount to large
cap regulated peers.
ALLETE, Inc. (ALE-NYSE; BUY; $51.00 price target; $2.90 EPS 2014E) - We believe ALE offers above-average growth
prospects through investment in renewables, environmental, transmission and potentially new generation, all in a constructive
regulatory environment. Although ALE customer Essar Minnesota Taconite notified the Company that production ramp-up
would be in late 2014, we believe the Company may see a slight tailwind in the same time frame from a mining project pursued
by PolyMet or 45-70 MW of load opportunity. Additionally, potential near- to medium-term catalysts include incremental wind
capacity and possible monetization of Florida real estate assets. We have lowered our price target to $51.00 from $55.00
per share. We add back the Florida real estate losses and apply a premium valuation, and then add back the real estate
book value in our valuation.
CMS Energy Corporation (CMS-NYSE; BUY; $28.50 price target; $1.75 EPS 2014E) - In our view, CMS offers solid
capital opportunities in a constructive regulatory environment. CMS has potential investment in renewables and baseload
natural gas generation. NOLs (net operating loss carry forwards) allow investment without meaningful equity needs. We
have reduced our price objective to $28.50 from $30.00 per share. We use a valuation premium of 8% to a peer group
of larger regulated names.
Cleco Corporation (CNL-NYSE; BUY; $48.00 price target; $2.75 EPS 2014E) - CNL has successfully completed its large
capital program and represents a free cash flow story. We estimate CNL can generate roughly $90 million of free cash
annually. Management has indicated it would utilize this free cash to seek investment opportunities with utility-like risk and
returns and/or return cash to shareholders through higher dividend payments or share repurchases. Our new $48.00 price
target (prior $49.00) is derived from the value of a premium utility, including earnings from rate-basing the Coughlin plant
and adding the cash generated by levering the plant to the utility’s capital structure.
IDACORP, Inc. (IDA-NYSE; BUY; $51.50 price target; $3.40 EPS 2014E) - IDA has investment opportunities around large
transmission projects and potential generation to fill the needs caused by expiring power contracts. We believe the Company
will continue to benefit in 2013 from continued hot and dry weather trends that drove 2Q13 earnings. Idaho regulation
August 29, 2013 Afternoon Call Summary
Page 9
continues to improve as evidenced by recent constructive settlements that act to put a 9.5% floor on IDA’s earned ROE. We
have reduced our price target to $51.50 from $55.00 per share based upon our view that shares should trade at a 5%
discount to the group given lingering risk that improvement in Idaho regulation stalls.
NextEra Energy, Inc. (NEE-NYSE; BUY; $84.50 price target; $5.30 EPS 2014E) - We expect rider recovery of growth
projects at the Florida utility will more than offset a potential decline in earnings at NextEra Energy Resources (NEER, the
unregulated generation segment). On the 2Q13 call, management announced a meaningful pipeline joint venture to bring
gas to Florida, approximately $1.55 billion from NEE. We remain buyers in the name as Florida's economy continues to
recover and management endorsed the top half of 2013 earnings guidance ($4.70-$5.00 per share). We have lowered our
price objective to $84.50 from $88.00 per share.
NiSource, Inc. (NI-NYSE; BUY; $31.00 price target; $1.65 EPS 2014E) - We view NI as a portfolio of attractive assets
in the gas distribution, electric utility and gas midstream businesses, coupled with a meaningful (100,000-200,000 acres)
position in the Utica/Marcellus. Our valuation is based on a sum-of-the-parts of companies in respective peer groups. We
have lowered our price objective to $31.00 from $32.00 per share to reflect the compressed multiples in the group.
Valuation Table for Price Target Changes
Pricing: August 28, 2013 Closing Price
Company Ticker Rating
2014E
EPS 2014 P/E
Price Tgt
P/E
Price
Target
American Electric Power Company,Inc.AEP Buy $3.30 13.1x 14.5x $48.00
Allete Inc.ALE Buy $2.90 16.5x 17.6x $51.00
CMS Energy,Inc.CMS Buy $1.75 15.2x 16.3x $28.50
Cleco Corp.CNL Buy $2.75 16.7x 17.5x $48.00
IDACORP IDA Buy $3.40 14.2x 15.1x $51.50
NextEra Energy,Inc.NEE Buy $5.30 15.3x 15.9x $84.50
NiSource,Inc.NI Buy $1.65 17.8x 18.8x $31.00
KBCM Utility Peer Group Average Multiple =14.8x
Source:KeyBanc Capital Markets Estimates
August 29, 2013 Afternoon Call Summary
Page 10
CONSUMER: Ingredion, Inc. (INGR) — Akshay S. Jagdale [phone] [e-mail], Lubi Kutua
[phone] [e-mail]
BUY from HOLD, Price Target: $75.00
2013: $5.30 from $5.30, 2014: $6.15 from $5.85
In recent weeks, Ingredion, Inc.’s (INGR-NYSE) stock has noticeably underperformed the market (the stock is down
approximately 13% since the Company announced its 2Q earnings on July 31, 2013, compared to a 4% decline in the S&P
500), which we think presents an attractive entry point. We attribute the recent weakness in the stock to three main issues:
1) significant cost inflation and adverse government policies in Argentina (9% of consolidated EBIT); 2) a slowing economy
in Brazil (13% of EBIT); and 3) investor concerns that the unfavorable price relationship between sugar and HFCS will lead
to meaningful switching from HFCS to sugar in North America (51% of EBIT).
We acknowledge that the situation in Argentina could deteriorate further before improving, but point out that the Company’s
guidance seems conservative (50% cut in profit expectations for that country) and exposure is relatively small (9% of EBIT).
We are optimistic about the outlook in Brazil as we believe the upcoming World Cup in 2014 and Summer Olympics in 2016
will likely give the local economy there a considerable boost. However, the main reason for our upgrade is our optimistic
outlook for North American EBIT (51% of EBIT). First, after performing some key channel checks, we believe that sweetener
users are not switching their usage from HFCS to sugar to any meaningful extent, despite the fact that spot sugar prices are
trading at a discount to HFCS compared to a premium historically. Second, futures prices for corn are pointing to a roughly
15% decrease in HFCS prices in 2014, which should make corn-based sweeteners/starches much more competitive relative
to other feedstock-based sweeteners/starches (including sugar). Lower sweetener/starch prices bode well for volume growth
in an industry in which capacity utilization rates are already close to peak levels (in the mid to high 80% range). Furthermore,
the aforementioned decline in corn prices combined with stable to higher gas prices have led to a significant improvement
in Ethanol margins, which also point to higher utilization rates for corn wet millers (ADM, Cargill and Tate & Lyle, which
make up over 80% of the U.S. corn wet milling capacity, all produce Ethanol and HFCS in their corn wet mills) going into
the 2014 contracting season (September through December of 2013). All in, we believe North American corn wet milling
utilization rates and margins are likely to improve year-over-year and perhaps even peak in 2014, which we believe is not
priced into the stock.
In addition, we estimate that the Company will have about $822 million (17% of its current market cap) in excess cash
available to distribute to shareholders over the next six quarters – $252 million (or around $3/share) estimated excess cash
on its balance sheet at the end of 2Q13, plus our FCF estimate of approximately $750 million minus $180 million in dividend
payments. For perspective, if we assume the Company were to use all the excess cash to buy back shares at an average
price of $75 (our price target), the Company could reduce its share count by about 14%. As such, we are upgrading the
stock to BUY and setting a price target of $75. Our price target of $75 implies a P/E multiple of 13.2x our NTM EPS estimate
of $5.67 compared to its agribusiness peer group average of about 12x.
Rating BUY
Price $61.70
12-Mo. Price Target $75.00
Market Cap $4,868.1
Trading Volume 600
Revenues(mm)$6,532.0
2014E $6.15
2014 P/E 10.0x
2013E $5.30
2013 P/E 11.6x
2012A $5.57
Book Value/Share $31.15
Next Quarter September
Next Quarter E $1.31
FC Mean Quarter $1.26
FC Mean 2014E $5.91
FC Mean 2013E $5.26
Yield 2.5%
We are optimistic about the outlook for North America in light of lower corn prices, which should lead to higher
margins than the street is expecting. First, after performing some key channel checks, we are confident that sweetener
users are not switching their usage from HFCS to sugar to any meaningful extent, despite the fact that spot sugar prices
are trading at a discount to HFCS compared to a premium historically. Second, futures prices for corn are pointing to an
approximately 15% decrease in HFCS prices in 2014, which should make corn-based sweeteners/starches much more
competitive relative to other feedstock-based sweeteners/starches (including sugar). Lower sweetener/starch prices bode
well for volume growth in an industry in which capacity utilization rates are already close to peak levels (in the mid to high
80% range). Furthermore, the aforementioned decline in corn prices, combined with stable to higher gas prices, have led to
a significant improvement in Ethanol margins, which also point to higher utilization rates for corn wet millers (ADM, Cargill
and Tate & Lyle, which make up close to 80% of the corn wet milling capacity, all produce Ethanol and HFCS in their corn
August 29, 2013 Afternoon Call Summary
Page 11
wet mills) going into the 2014 contracting season (September through December of 2013). All in, we believe North American
corn wet milling utilization rates and margins are likely to improve year-over-year and perhaps even peak in 2014, which we
believe is not priced into the stock.
Channel checks suggest that widespread switching from HFCS to sugar is unlikely. The recent price trends between
sugar and HFCS have sparked concerns among some investors that we are likely to see meaningful switching from HFCS to
sugar within the food and beverage industries, which would have negative implications for HFCS producers such as INGR.
We recently spoke with two of the largest U.S.-based companies in the sweeteners space, as well as a major soft drink
bottling company in Mexico, and believe that widespread switching from HFCS to sugar within the beverage industry is
unlikely in both the United States and Mexico. Our conversations indicate that there has been virtually no switching in the
United States despite the favorable pricing of sugar relative to HFCS in recent months, as the economics of HFCS vs. sugar
are not considered bad enough to warrant large-scale switching. Furthermore, the domestic market has less optionality to
switch back and forth between the two as compared to some other countries, including Mexico. We note, however, that overall
HFCS consumption in the United States has been on a steady and gradual decline for a number of years now and remains
a legitimate long-term risk for the category. With regard to Mexico, our conversations indicate that while there may be some
switching taking place among some of the smaller fringe players within the market, these trends are generally exclusive of
the beverage industry. We estimate that overall demand for HFCS in Mexico is approximately 1.2 million tons per year, of
which roughly 750,000 tons is specific to the beverage industry. Our channel checks indicate that the two largest soft drink
bottling companies in Mexico (which represent just over 80% of the Mexican beverage market; we spoke to one) are not
altering their HFCS / sugar usage in a meaningful way, in part due to requirements by the global soft drink company on
the type of sugar that can be used, as well as the required blend level between sugar and HFCS. The bottlers are required
to use refined sugar (rather than raw sugar); the price differential relative to sugar is not considered substantial enough to
warrant any large-scale switching. In addition, the soft drink company requires that the bottlers use at least 50% sugar in
their beverages, but the bottler we spoke to indicated that its sugar supplier does not currently have the capacity to supply
them with substantially more refined sugar; thus, they still have a significant demand for HFCS. Given that a meaningful
increase in Mexican sugar capacity is not expected anytime soon, we expect demand for HFCS to remain relatively stable,
which bodes well for INGR’s HFCS export business.
We believe the Company could buy back 10-14% of its shares outstanding over the next 18 months. In addition, we
estimate that the Company will have roughly $822 million (17% of its current market cap) in excess cash available to distribute
to shareholders over the next six quarters – $252 million (or about $3/share) estimated excess cash on its balance sheet at
the end of 2Q13, plus our FCF estimate of around $750 million minus $180 million in dividend payments. For perspective, if
we assume the Company were to use all of the excess cash to buy back shares at an average price of $75 (our price target),
the Company could reduce its share count by about 14%.
We believe Brazil could be poised for a turnaround, driven by the upcoming World Cup and Summer Olympics.
One of the reasons why INGR recently lowered its guidance was due to the fact that the Company’s earlier projections had
factored in a slow improvement in economic activity in Brazil, which did not appear to be materializing. In particular, the
Company mentioned that sales to the brewing industry in Brazil had been especially weak as high food inflation eroded
consumers’ disposable income and general economic activity in the country looked soft. For perspective, AB InBev, one of the
largest brewers in Brazil, echoed INGR’s remarks and recently lowered its outlook for beer volume growth in Brazil, adding
that it now expects volumes to be either flat or down low single digits for the year. While we do not anticipate a dramatic and
immediate turnaround in the Brazilian economy, we think the country’s near-term outlook looks more promising as we believe
the upcoming World Cup in 2014 and Summer Olympics in 2016 will likely give the local economy a considerable boost.
Argentina remains a legitimate concern, but we believe this is largely priced into the stock. In Argentina, INGR’s ability
to adjust its prices for rising raw material, energy and labor costs has been significantly limited by Argentinean government
policies, and we believe that this remains a legitimate concern. The Argentinean government’s policies, coupled with the
hyperinflation and currency devaluation currently being experienced in the country, have already had a significant negative
impact on INGR’s cost structure and are likely to pressure margins in the Company’s South America business even further.
We believe that the situation in Argentina could get worse before things eventually start to improve, but we think this is largely
priced into the stock already.
The price gap between HFCS and sugar (a substitute) has narrowed in recent months, but investors should use
caution when using this data as a proxy for the absolute prices paid by users given that contracted prices are not
reported and tend to be lower than spot rates. First, the prices HFCS users pay are based on contracts that are not made
August 29, 2013 Afternoon Call Summary
Page 12
public. The price of HFCS reported by the USDA is a descent proxy for the direction in which prices move but is not a good
proxy for the absolute prices or price gaps between sugar and HFCS. With that being said, following are the main findings
of our analysis of the relationship between spot HFCS prices (as reported by the USDA) and sugar in the United States and
Mexico: 1) HFCS has usually traded at a discount to sugar in both the United States and Mexico (average spread between
refined sugar and HFCS-55 has been around 7.9c/lb and 6.9c/lb in the United States and Mexico, respectively, since January
2000); and 2) since October/November 2012, the price relationship between HFCS-55 and sugar has become inverted –
i.e., refined sugar has traded at an average discount to HFCS-55 of about 8.6c/lb (or 22%) in the United States, and about
6.6c/lb (or 17%) in Mexico. We believe much of the recent pricing trends can be explained by higher corn prices as a result
of last year’s drought, and is further exacerbated in Mexico as a result of the record sugar crop there, which has pushed
sugar prices (particularly raw sugar) significantly lower.
Channel checks show that beverage companies are not switching to sugar (from HFCS) despite a narrowing of the
price gap (between sugar and HFCS), and with HFCS costs slated to come down 15% in 2014, the probability of
switching in 2014 is even lower. Given that sugar and HFCS-55 can be used as substitutes for one another, we were
interested to see whether the recent inverted price relationship has led to companies switching from HFCS-55 to sugar,
particularly among soft drink producers in North America (such a shift would likely have negative implications for HFCS
producers such as INGR). We spoke with two large, publicly traded companies in the United States, both of which are
significant players in the North American sweeteners market, as well as one large soft drink bottling company in Mexico.
What we found is that the negative price relationship of HFCS relative to sugar seems to have had a greater impact in the
Mexican market than in the United States, but that there is very little evidence of switching within the beverage industry in
both countries (i.e., any switching that has occurred between HFCS and sugar appears to have come from non-beverage
producers).
There is some evidence of food companies switching to sugar in Mexico, but this is likely to reverse in 2014 as
the price gap between sugar and HFCS normalizes. Additionally, we analyzed supply and demand, as well as export
volume data from the USDA, to look for any emerging trends. Interestingly, export data provided by the USDA points to pretty
significant year-over-year declines in U.S. exports of HFCS-55 to Mexico (on a dry weight basis, in metric tons, the USDA
data points to a 20% year-over-year decline in 1H13). Given our belief that most of the declines in HFCS consumption in
Mexico are coming from industries other than the beverage industry, the USDA data would imply that declines among non-
beverage producers are even higher than the aforementioned 20% (we estimate around 54%). For perspective, we estimate
that the overall import demand for HFCS in Mexico is approximately 1.2 million tons per year, of which roughly 750,000 tons
is specific to the beverage industry. We believe that the large year-over-year declines in HFCS consumption among non-
beverage producers in Mexico can be attributed to the fact that companies outside of the beverage industry are more easily
able to switch back and forth between sugar and HFCS, and they are less restricted in terms of the types of sugar that
they can use (specifically, raw sugar vs. refined). Raw sugar in Mexico is even more favorably priced relative to HFCS than
refined sugar (raw sugar has traded at an average discount to HFCS of about 32% since November 2012, vs. an average
discount of about 17% for refined sugar).
Valuation relative to normal earnings looks attractive in light of our positive outlook for North American corn wet
milling margins in 2014. We view INGR as a very well-managed company that operates in a relatively commoditized
industry. Over time, the Company’s ROIC has trended up and we expect this trend to continue as the Company improves its
sales mix toward more stable, higher margin value-added products. Also, the Company’s strategy to stay away from Ethanol
production and open corn hedging policy make it a lot less risky investment than some of its wet mill peers (ADM and Tate &
Lyle). With that being said, the Company is not immune to the relatively commoditized/cyclical nature of the corn wet milling
industry. As such, we prefer to value the company on a normalized earning range, which we derive based on our view of
what the Company’s sustainable ROIC could be. We believe INGR should be able to earn an ROIC at least 300-500 bps
over its cost of capital (which we assume to be approximately 8% on a normalized basis). Over time, we expect this spread
to increase. In our earnings power analysis (see Figure 4), we are assuming an ROIC of 12% in our base case, 10% in
our downside scenario and 14% in our upside scenario. Our calculations suggest that INGR’s long-term earnings power is
somewhere in the range of $3.98 (downside scenario) to $6.44 (upside scenario) in EPS – our base case scenario suggests
earnings power of $5.27. The stock’s last closing price (August 28, 2013) of $61.70 implies a P/E multiple of 11.7x our
base case earnings power estimate of $5.27 (15.5x in our downside scenario, and 9.6x in our upside scenario), which is a
3% premium to its average P/E of about 11.4x (max 16.7x, min 5.8x) on a normalized basis over the past eight years. For
perspective, we estimate that during periods of peak industry margins for corn wet millers, INGR’s stock trades in a range
of roughly 13-16x normal earnings. In other words, while the stock does not appear excessively inexpensive relative to its
own history, we believe that the current valuation looks attractive in light of our positive outlook for North American corn
wet milling margins in 2014. In other words, we expect the stock to trade within the aforementioned 13-16x range relative
August 29, 2013 Afternoon Call Summary
Page 13
to our normal earnings estimate over the next 12-18 months given that we believe margins in North America are likely to
improve and perhaps reach peak levels.
We are increasing our FY14 EPS estimate. We are increasing our FY14 EPS estimate from $5.85 to $6.15, which
represents 16% year-over-year growth (consensus was at $5.91, or 12% year-over-year growth). The increase primarily
reflects our expectations for better year-over-year improvement in North America margins relative to our previous estimate
(we now expect an operating margin of 12% in North America for FY14 compared to our previous estimate of 11.2%).
VALUATION
In terms of valuation, INGR currently trades at 10.9x our NTM EPS estimate of $5.67, which is 9% below its agribusiness peer
group average of about 12x. On our normalized EPS estimate of $5.27, the stock currently trades at 11.7x. For perspective,
we estimate that during periods of peak industry margins for corn wet millers, INGR’s stock trades in a range of roughly
13-16x normal earnings. Therefore, given our view that North American (51% of EBIT) corn wet milling utilization rates and
margins are likely to improve significantly year-over-year and perhaps even peak in 2014, we believe the stock’s current
valuation is attractive. As such, we are upgrading the stock to BUY and setting a $75 price target. Our price target of $75
implies a P/E multiple of 13.2x our NTM EPS estimate of $5.67, which is a 10% premium to its agribusiness peer group
average of about 12x.
RISKS
Risks that could impede the stock from achieving our price target:
Continued weak global economic conditions could adversely affect demand for INGR’s products. INGR’s future
volume growth and improvements in product mix are largely dependent on a healthy global economy, so to the extent
conditions remain weak or worsen owing to sovereign debt problems, high unemployment levels, declining home prices, food
and energy inflation, natural disasters or other issues, INGR’s volume and mix performance could suffer as a consequence.
Not only would INGR’s volume and, consequently, revenue growth be adversely affected, but its capacity utilization would
likely decline as a consequence as well, hurting margins.
Significant fluctuations in corn and other raw materials could adversely affect INGR. Corn and other agricultural
commodity prices have been rising and have become increasingly volatile in recent years. Significant fluctuations in the
price of corn and INGR’s other input costs could make doing business more difficult for a number of reasons. Outside North
America, INGR enters into short-term contracts and consequently has to keep raising prices in a situation in which corn prices
are rising. The natural lag effect hurts INGR. In addition, INGR’s customers are sensitive to higher prices, particularly in a
weak economy such as this one. Therefore, INGR could face demand resistance if it tries to raise prices above a certain level.
August 29, 2013 Afternoon Call Summary
Page 14
KeyBanc Capital Markets Inc. Disclosures And Certifications
Important disclosures for the companies mentioned in this report can be found at https://key2.bluematrix.com/sellside/
Disclosures.action.
Reg A/C Certification
The research analyst(s) responsible for the preparation of this research report certifies that:(1) all the views expressed
in this research report accurately reflect the research analyst's personal views about any and all of the subject securities
or issuers; and (2) no part of the research analyst's compensation was, is, or will be directly or indirectly related to the
specific recommendations or views expressed by the research analyst(s) in this research report.
Rating Disclosures
Distribution of Ratings/IB Services
KeyBanc Capital Markets
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY]224 43.33 49 21.88
HOLD [HOLD]280 54.16 64 22.86
SELL [UND]13 2.51 4 30.77

Rating System
BUY - The security is expected to outperform the market over the next six to 12 months; investors should consider adding the security to
their holdings opportunistically, subject to their overall diversification requirements.
HOLD - The security is expected to perform in line with general market indices over the next six to 12 months; no buy or sell action is
recommended at this time.
UNDERWEIGHT - The security is expected to underperform the market over the next six to 12 months; investors should reduce their
holdings opportunistically.
The information contained in this report is based on sources considered to be reliable but is not represented to be
complete and its accuracy is not guaranteed. The opinions expressed reflect the judgment of the author as of the
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