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Pure Circle -- >>> Investing In The Sweet

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gfp927z   Friday, 05/02/14 07:28:22 PM
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Pure Circle -- >>> Investing In The Sweet And Potentially Lucrative Stevia Pie

Feb. 3, 2014

About: PCRTF, Includes: KO, PEP, SANW, STVF


When we start talking about two-year returns in excess of 550%, investors automatically assume biotechnology or possibly some small/midcap technology company with a major and unexpected partnership. Yet regardless of what comes to mind, the actual list of companies to produce such gains is small. What might be the most surprising company on that list is one called PureCircle (OTCPK:PCRTF).

Sure, more than likely you've never heard of PureCircle. Well, it's a billion-dollar company in the agricultural space-- definitely not as glamorous as a biotechnology company, but more efficient. And when I say more efficient, I mean less risk and just as much upside-- and this is in an industry that could turn tens of millions into tens of billions in annual revenue. Yowza!

So what is this industry? Will PureCircle's rally days continue? And are there more companies in line to join this party?

What is PureCircle?

PureCircle is the worldwide leader in all things stevia, a zero calorie all-natural sweetener that is 300 times sweeter than sugar. Recently, stevia has been dubbed (perhaps a little quasi-grandiose) "the Holy Grail" of the sweetener industry, which might have something to do with PureCircle's large returns.

With that said, for PureCircle to produce such impressive returns over the last two years it must have grown rather fast. So let's look at a few key fundamental metrics from 2011 to 2013.




$53.26 million

$76.2 million

Gross Profit

$4.1 million

$18.8 million


($9.9 million)

$4.85 million

Obviously, PureCircle has grown fast over the last two years, approximately 43%, and the company has improved its efficiency by a far greater margin. However, the fundamental growth seen in the chart above hardly validates such a large return.

PureCircle trades at multiples that are very similar to what we see in social media or with orphan drug companies. Currently, it is trading at 13.1 times last year's sales and 53.2 times gross profit; the latter is about twice the premium of LinkedIn (LNKD) to its gross profit.

However, when you look at industry trends and consider the outlook, PureCircle might have more upside potential than any orphan drug company or the likes of LinkedIn. In particular, PureCircle with $76.2 million in revenue is the world leader in stevia-based products. Yet, it operates in a sweetener market that is estimated at $60 billion globally.

According to the World Health Organization, stevia could one day own 20% to 30% of that $60 billion market, or $12-$18 billion. As such, there is quite a bit of room for PureCircle to grow.

Why is This Industry Growing so Fast?

For PureCircle's growth over the last two years and the rather bullish long-term outlook, investors can thank former Mayor Michael Bloomberg of NYC, health organizations, local politicians, and the consumer's overall increase of knowledge surrounding the health risks of sugar intake.

Over the last year or so, major food and beverage companies have felt increased pressure from all of the above sources to produce healthier alternatives and low calorie alternatives to high-sugar products. Last year a calorie limit was implemented in school vending machines, which consequently removed most Coca-Cola (KO) and PepsiCo (PEP) products. This is just one of many changes that have occurred, which has left these large corporations desperate and rapidly trying to implement stevia into their products to lower calories. It's important to note that even diet sodas have felt the wrath of a more health conscious consumer, as sales volume has fallen approximately 12% over the last six years.

This brings the conversation back to PureCircle, which is a great gauge of the trends in the stevia market. According to its 2013 annual report, PureCircle finished the year with 300 customers, which was an increase of more than 200 over 2012. Furthermore, stevia volume increased 89% in 2013, significantly higher than growth. But as PureCircle notes, this volume has "not yet" translated into revenue growth due to high inventories by partners.

Nonetheless, PureCircle is seeing a rapid boost in demand and, as a result, the firm has had to make major operating changes. For one, demand has become a real issue. And what's alarming is that stevia is not even a fraction of how large experts believe it could become. In addition, the U.S. and many other countries are not well positioned to harvest stevia, as most land for sweeteners is allocated to grow sugar. Consequently, PureCircle is faced with a dilemma where acreage is precious. Since PureCircle doesn't actually grow its own products (PureCircle partners with local growers), the company is now seeking (and has previously sought) partners in new land.

Overall, if PureCircle can manage demand and stay on top of supply, then it can grow many times larger over the next decade.

Is PureCircle Your Best Stevia Investment Option?

As we stand today, there really aren't a lot of investment options for stevia. Cargill might come to mind (as the owner of Truvia), but unfortunately it is a private company and one of the most visible agriculture businesses in the world. In essence, PureCircle has soared over the last two years because the options are limited, but it has now reached a valuation that is rather pricey. What are some other options?

S&W Seed (SANW) and Stevia First Corp. (OTCQB:STVF) are the only two options that really come to mind, although both are small companies.

S&W Seed is an alfalfa seed grower, but has connections to stevia. In a recent article, Henry Kawabe did an exceptional job at highlighting S&W as a stevia business, including its move from a commercial to a research company.

PureCircle actually chose S&W as a partner in North America to supply stevia. More than likely, this partnership was less about S&W as a company, but rather its acreage and positioning in California's Central Valley, which is the agricultural capital of the country. In late 2012 to early 2013, speculation surrounding this partnership caused shares of S&W to nearly double, as investors saw a great opportunity with stevia as a larger revenue stream than alfalfa seeds.

Unfortunately, S&W botched its first stevia harvest by adding herbicide and has since been very hesitant to speak of or discuss plans as it relates to its stevia ventures. In fact, due to the botched harvest and millions it cost S&W, the company has transitioned from commercial harvesting of the commodity to focusing almost solely on research. While this might be good for S&W long-term, it is bad for PureCircle, a company that still needs more stevia production. This also takes S&W out of the running for becoming a prime North American stevia grower in the near term.

I urge you to read Henry Kawabe's article for a full discussion of this topic, including filings and quotes from the company.

This brings up Stevia First, which is just a $30 million company, but has spent the better part of its existence in research & development. The reason it must be included in the stevia conversation is because this is one of the few companies that has ambitions of large-scale production of stevia in North America.

Over the last six months Stevia First has had its valuation increase 50%, which has occurred due to the company's own transition from clinical research to commercial production. Stevia First now has its own product; it recently completed a taste test, and you can hear about the company's future plans and its products in the CEO's recent interview on Bloomberg.

What makes Stevia First interesting for the future is the growth potential of the crop, the firm's emphasis on research, and its positioning. Stevia First is located in the same region as S&W, in the Central Valley with more than a 1,000 acres to harvest. This is precious land to a company such as PureCircle-- and more importantly, Stevia First owns a patented fermentation process from Vineland Research that essentially removes the aftertaste from stevia.

The aftertaste associated with stevia has been the Achilles Heel of the industry, as it makes combining with food and beverages very difficult. However, Stevia First's technology allows the company to modify stevia and tailor-make it to a product-- and (like I said) without an aftertaste. This could be huge for the stevia industry and a company like PureCircle who is seeking partners and increasing its scale rapidly.

However, as attractive as Stevia First may appear to potential partners and perspective investors looking to enter this space, risks must also be acknowledged. For one Stevia First is an OTC stock, meaning it does not trade on one of the large exchanges. Also, Stevia First is solely focused on the development of stevia products, which means there are risks associated with whether or not this market grows to meet expectations.

Furthermore, Stevia First has spent many years in research, ensuring its stevia is a best-in-class product and that it minimizes risk. However, due to its size, the company can not afford any bad harvests, excess supply, or a failed commercialized product with large investments. So for, Stevia First has done well at operating slowly, smartly, and efficiently, but with its limited capital this trend must continue or Stevia First could be crippled, and the stock would suffer.

With that said, investors assume that Stevia First's primary goal is to find a partner with the likes of PureCircle, Cargill, or a large food & beverage company in order to minimize financial risk. Investors also assume that given Stevia First's land, technology, and experience that it won't have any troubles in finding partners now that the company has entered the commercial phase. However, Stevia First's plan may not include the likes of PureCircle or Cargill. The company now has its own sweetener and is using just a fraction of its land for production, meaning it could make the decision to operate solo. While the company's first product is unlikely to generate $100 million in revenue, it is the first in a long line of new product releases that Stevia First has planned, which combined could create significant sales.

The bottom line is that Stevia First has a lot of options, and is well positioned to thrive in this ever-growing stevia market so long as management doesn't take any large risks and stevia as a commodity continues to surge in use.


PureCircle is the leader in all things stevia; while Stevia First presents a different investment alternative, I am in no way suggesting that it will become the next PureCircle or surpass it in global positioning.

PureCircle is undoubtedly best positioned for the global growth of stevia. As a result, it has been priced as such. The stock is expensive, but if stevia could really become 20%-30% of the sweetener industry (and reports from Credit Suisse, ABC, New York Times, CNN, Time, and The Wall Street Journal are correct), then PureCircle has much more to gain in the years ahead.

With that said, PureCircle will not be the only opportunity in this space as it grows larger. Other agriculture names will likely re-shift their focus and acquire smaller companies with the technology and acreage so that they can compete. As such, I think companies like Stevia First are well positioned for this change-- and with a market cap of $30 million, it is very possible that the last six months could be a consistent reflection of the future.

You know what to do: perform due diligence and consider the risks. But at least explore this space for potential investments. Because if stevia does gain ground on sugar, it could be one of the more significant revenue-generating markets of the next decade and large gains will be a certainty.


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