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Earnings Wrinkle

This food company reported mixed results as it smoothes out issues in one of its units, but its prospects look strong.
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SunOpta (STKL) announced second-quarter earnings results last night, and although the numbers were shy of analyst forecasts, we aren't changing our bullish 12-month outlook on the stock just yet, and we aren't taking any action in this note. Shares are up 4% in the premarket, at $6.15.

The company reported earnings of 6 cents a share on sales of $103 million. The Street was looking for sales of $102 million, which SunOpta beat, but its 6-cent profit was a penny shy of expectations. The company raised its full-year revenue guidance from $385 million to $415 million, which reflects a combination of internal sales growth and the addition of sales from SunOpta's recent acquisitions.

As the company disclosed in its press release, the quarter was negatively affected by issues in its Canadian Food Distribution Group, including supply, freight, competition and integration of acquisitions. Even though the unit contributes a little less than 25% of sales, these issues are rather disappointing given management's attempts to improve execution. But we remain firm believers that the strong industry tailwinds driving demand for natural and organic food and grain ingredients will continue to support shares of SunOpta.

We believe shares will trade closer to one times the company's new 2005 sales forecast of $415 million in the coming year. This implies about 19% upside from the current quote, or a price of $7.33 a share.

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