07 November 2005


Splenda is great. I was tempted to say "splendid" but that's too obvious. It sweetens my coffee, and the cans of Pepsi One I favor at the office. I'm dropping some weight avoid sugar, while maintaining the requisite caffeination that keeps me working, and blogging.

I put up with Aspartame (Equal) in Diet Coke, but it has always tasted fake and cloying to me. Saccharin (Sweet and Low) had appetizing cancer warnings printed on the pink packets when I was younger, so I never warmed to the stuff.

While I was drinking some coffee last night, I thought, how can I make money off of this great product that's appearing in more food and beverages, every day?

I put down my patent bar materials and went to work on Google. What I found was not very promising as Business Week cast a suspicious eye over the British maker of Spenda back in January. Splenda is a success, but capacity and competition issues, along with a stock price run-up, make its maker a questionable investment.

It's Not All Sweetness for Splenda
Although the sugar substitute's British maker, Tate & Lyle, has seen
its stock rise smartly, analysts doubt this high will last
For a slow-growth maker of sugar and starch whose roots go back to the
mid-19th century, Britain's Tate & Lyle was an unexpected success
story in 2004. It started off last year warning that due to rising raw
materials costs it wouldn't meet profit forecasts. But by November it
boasted a 9% jump in profits in the prior six months. And by yearend,
Tate & Lyle's stock price was at $8.86 on the London stock change, a
jump of nearly 50% from $5.94 when 2004 began. It was recently
readmitted into the blue chip FTSE 100-stock index after being out for
seven years.

The reason for Tate & Lyle's turnaround? The newfound popularity of
sucralose, a sweetener it manufactures that's used as an ingredient in
low-calorie products and sold in tabletop form under the name Splenda.
While sales of the sweetener, which was approved in the U.S. in 1998,
seem set to grow worldwide for years to come, that doesn't mean shares
of Tate & Lyle, (which has a thinly traded American depositary receipt
[ADR] that trades over-the-counter in the U.S. with the symbol TATYY
), will continue to soar in 2005. Analysts who cover the sugarmaker
warn some potential bitterness may be ahead.

The reasons have nothing to do with sucralose's popularity. Indeed,
Splenda is gaining market share over other tabletop sweeteners. Its
sales have grown 126% in the past two years while rival sugar
substitutes have declined by 8%, according to research firm Mintel
International Group. The sweetener is also being used as an additive
in a growing number of packaged foods.

A CLEAR WINNER. Unlike artificial sweeteners like aspartame,
sucralose retains its taste after being heated, which means it can be
used as an ingredient in products that are baked and pasteurized. It
was used in 1,436 new products worldwide in 2004, up from 573 in 2003
and 35 when research firm Datamonitor started tracking it in 1999.
Sucralose "was one of the major trends for the last year," says Tom
Vierhile, executive editor of Datamonitor's new-product database
Productscan Online.

In an era of heightened concern over obesity and devotion to low-carb
eating, sucralose has been a clear winner. And Tate & Lyle is its sole
manufacturer, thanks to an agreement arranged last February with its
longstanding partner in the sucralose business, Johnson & Johnson's
(JNJ ) McNeil Nutritionals, which markets Splenda in the U.S.
CAPACITY BOTTLENECK. That doesn't mean the profit growth and stock
gains will continue for long, however. Despite sucralose's popularity,
Tate & Lyle faces several major hurdles that could trip it up in 2005,
warn analysts.

The most immediate problem: Tate & Lyle can't produce enough sucralose
to meet demand. In November, it announced that it wouldn't be taking
on new customers until it had increased its production capacity. Tate
& Lyle is spending $75 million to double capacity in its single
existing sucralose manufacturing plant in Alabama by 2006. It's also
building a new $175 million factory in Singapore that will be ready in
2007. Until those plants come on-line, Tate & Lyle won't be able to
handle a big increase in new customers or products.

Increased competition is another threat. With growing demand for sugar
substitutes, new products are likely to come on the market.
NutraSweet, which sells the sugar substitute aspartame, has begun
selling a new sweetener called neotame as an ingredient in beverages,
sweets, and ready-to-eat meals. "We see the category as such that
there's room for a lot of players," says Kevin Bauer, senior
vice-president for marketing at NutraSweet.
And the stock isn't cheap relative to its historical valuation.
Merrill Lynch analysts wrote in a November report that the price was
already "almost entirely factoring in the benefits from the additional
capacity for Splenda production including the additional plant in

Here is an update on Sucralose performance and production from Tate & Lyle on November 3, 2005:

Profits of GBP 33 million ($60 million) from our SPLENDA(R) Sucralose business were GBP 7 million ($13 million) higher than in the comparative period. GBP 4 million ($7 million) of the increase was due to an IFRS stock adjustment in the comparative period. Market share increased in all three sectors (food, beverage and pharmaceutical).

There have been a number of major US diet beverage product launches with SPLENDA(R) Sucralose in the period as well as flavoured waters. During the last eighteen months the "Sweetened with SPLENDA(R)" brand logo has been approved for use on over 1,200 consumer products.

Sales totalled GBP 74 million ($135 million), (GBP 62 million, $113 million). Demand continued to outstrip production even though capacity was increased during the period as part of the first expansion project at the McIntosh, Alabama plant was brought on stream. The completion of this and the second expansion project at McIntosh, both due to be finished by April 2006, are on schedule and on budget, as is the building of a new plant in Singapore with a completion date of January 2007.

What about the also-rans, I mean, Splenda's competition?

Merisant, the company that bought Equal from Monsanto, is private.
Merisant spun off NutraSweet, which is also private. Cumberland
Packing owns the saccharin brand Sweet & Low

wait for it


it's private.

Hoovers' website helped me piece together these competitors and also
to find out their inaccessibility to my investing dollars. Until I hit
Alberto-Culver (ACV), owner of many consumer brands, including the
saccharin product, Sugar Twin. The sighting of a yellow packet amidst
the blue and pink packets of artificial sweeteners used to be rare.
That rare appearance was brought to you by Sugar Twin.

So, for comparison's and completeness sake, let's look at

TATYY is the ADR for Tate & Lyle. It trades for around $34.50, but I'm not interested in an obscure, low-volume security. And I'm not interested in buying stocks that trade on the FTSE.

ACV trades for around $42.50 per share. Its ROIC is 13.01% according to SmartMoney.com. Its P/E is around 18, and is trading within a dollar of its 52-week low, $14 below its 52-week high. Free cash flow for '04 was $184.6M. The average annual increase in free cash flow over five years is %39.9.

JNJ trades for around $61.30 per share. Its ROIC is 25.72% according to SmartMoney.com. Its P/E is around 19, and is trading about $4 above its 52-week low, almost $9 off its 52-week high. Free cash flow for '04 was $8.956B. The average annual increase in free cash flow over five years is 19.9%.

ACV makes its money in beauty supply, not in its miniscule sugar substitute business.

JNJ generates a tremendous amount of cash. Increased Splenda usage contributes to this, but it is a mere pittance if Tate & Lyle is boasting about sales of $135 million. Really, JNJ is not much of a Splenda play. The pressing concern with JNJ is the coming litigation over the messy Guidant takeover.

Perhaps I should pour another cuppa Joe, add a dash of Splenda, and leave it at that.

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