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Friday, November 7, 1997


The UniMark Group, Inc.
(Nasdaq: UNMG)
Phone: 817-491-2992
Price (11/6/97): $5 1/8


HOW DID IT FIND TROUBLE?

Just over a year ago, tropical fruit grower and distributor UniMark Group was marked by the sweet smell of success. The company had picked up not one but two favorable articles in Investor's Business Daily. By mid-1996 the company's stock had grown to a lush and luscious $17 3/4 per share.

Since then, the shares have rotted on the vine. UniMark has struggled to get a handle on a string of acquisitions and has reported four straight quarters of losses. Sales to Japanese food manufacturers, once 33% of the revenues, have all but dried up.

Revenue for FY96 increased 77% to $65.2 million, but gross profits fell to 28.6% from 34.4% and SG&A expenses soared to 27% of revenue from just 22.9%. Despite raising $22 million in a secondary offering, UniMark also reported that net interest expenses rose to 1.4% of sales, reversing a gain of 0.4% the year before.

For the first half of this year, gross profits rose to 33.8%, but SG&A expenses now run fully a third of revenues. With its Japanese customers still working through inventory and orange juice concentrate sales falling below expectations, UniMark simply has excess overhead and inventory. Net interest expenses also rose to 3.5% of sales in the second quarter.

Though the stock rallied for a near double this summer, thanks partly to takeover rumors, it has recently been squeezed. On Oct. 7, longtime supporter Rodman & Renshaw cut the company to "neutral" from "buy" and slashed earnings estimates.

Analyst Elizabeth Downey said the changes reflected lowered expectations for UniMark's instant quick-freeze product and juice profitability, as well as the fact that an altered sales mix and higher interest expenses would pressure earnings. The fruit grower was sliced nearly $1 to $6 5/16 on the news.

BUSINESS DESCRIPTION

UniMark grows, processes, markets, and distributes citrus and tropical fruits through operations in Mexico, the U.S., and Canada. It focuses on fresh, chilled, frozen, and canned cut fruits and other specialty food ingredients. Its brands include Sunfresh, Fruits of Four Seasons, Flavor Fresh, and Jalapeno Sam. Last year, 28% of revenues came from retail channels, 23% from food service providers,19% from the sale of citrus juices or oils, and 12% from wholesale clubs.

Investors were once enthusiastic about UniMark's unique processing method that separates cold-peeled citrus fruit into individual juice-containing "cell-sacs," which have been used in Japan to enhance the flavor and texture of fruit juices and desserts. These cell-sacs are featured in UniMark's new FruitJelite jells introduced nationwide in 7-Eleven stores in August.

The firm is also noted for its cryogenic individual quick-freeze processing, which preserves a fruit's fresh-cut texture and taste. This processing has allowed the firm to expand its foodservice and wholesale club business.

The company has built a vertically integrated business through acquisitions. Deals finalized in the last two years include Deli Bon, a Canadian fruit processor; GISE, a Mexican producer of citrus concentrates, oils, and juices; and Simply Fresh, a fruit processing and distribution firm in Los Angeles. The company continues to invest in infrastructure, spending $7.5 million in cash during the first half of 1997 while securing loans for additional improvements.

In October 1996, UniMark's GISE unit signed a 10-year contract to supply COCA-COLA (NYSE:KO) with lemons. Planting began last November and will be completed in 2000. Harvesting will commence in late 1998. The project will require an investment of $27 million through 2000. Rodman & Renshaw once suggested the deal could add $75 million a year to UniMark's annual revenue once the lemon groves are fully producing.

Insiders own about 17% of the stock.

FINANCIAL FACTS

Income Statement
12-month sales: $72.3 million
12-month income: ($3 million)*
12-month EPS: ($0.41)*
Profit Margin: N/A
Market Cap: $44 million
(*Fully diluted, before one-time gains.)

Balance Sheet
Cash: $1.3 million
Current Assets: $48.6 million
Current Liabilities: $38.6 million
Long-term Debt: $8.7 million

Ratios
Price-to-earnings: N/A
Price-to-sales: 0.6

HOW COULD YOU HAVE SEEN IT COMING?

Prior to last year, UniMark had delivered fruitful returns. Yet a secondary offering at $14 1/2 in June 1996 might have raised concerns. Most companies perform relatively poorly immediately after returning to the equity markets.

Still, the analysts remained optimistic despite UniMark's troubles, putting FY98 estimates at $0.83 per share as recently as three months ago. But after two down quarters, an investor should seriously re-evaluate a company's prospects, especially when it's having trouble digesting acquisitions and has seen a major revenue steam grow sandy.

WHERE TO FROM HERE?

At the end of June, UniMark was sitting on excess inventories, though management expected them to be worked down during the rest of the year. The company also remained hopeful about Japan, with sales to that country expected to pick up by the fourth quarter.

Although overall sales increased just 6% in the second quarter, the acquisitions have delivered growth. Retail sales rose 71.2%, foodservice sales shot up 54.7%, and warehouse club sales jumped 51.7%. Still, the company reported an operating loss of $0.05 a share.

Four of the five analysts covering UniMark have lowered earnings estimates in the last 30 days, according to First Call. The consensus numbers now stand at $0.01 per share this year and $0.54 in FY98. The low estimates call for a loss of $0.08 in FY97 and profits of just $0.40 per share in FY98. A YPEG using one analyst's 15% long-term growth estimate suggests fair value between $6 and $8.

For now, an investor can probably find better fruit elsewhere. Still, the stock does trade around book value. That means if UniMark can juice up its earnings, the bears might find themselves cryogenically frozen and left to hibernate while investors kick back with a fruity daiquiri. Third quarter earnings are due any day now.

--Louis Corrigan
(TMFSeymor@aol.com)


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