Young Gun Portfolio holding Chiquita Brands (NYSE: CQB ) reported first-quarter results last week, so it's time to check in on our bananas. Let's run through the numbers:
- Revenue up 2% to $824 million. My thesis doesn't bank on top-line growth (I expect less than 1% growth this entire year), so this figure is in line with my expectations. What is surprising is the composition of that 2%. Banana sales were up 13%, primarily because of higher prices in Europe, while salad sales were down 8%. This is a much more exaggerated version of the slight uptick in banana revenue and slight downtick in salad revenue I expected for this year.
- Blended operating margin at 7.2%. This is a strong improvement from the year-ago quarter, when the margin clocked in at just 0.7%, and 7.2% is right in the 7%-7.5% range that is central to my thesis on Chiquita. But there was a surprise here also: Bananas ran a 10.4% margin, much higher than I expected, while salads yielded just 2.5% in operating income. The "other produce" segment actually lost money, but it is a small division with volatile results, so I wouldn't read into that much.
- Administrative costs of $17 million. This is a good piece of news, because it means that cost-cutting measures are working. Corporate costs were down absolutely and as a percentage of revenue.
- Earnings of $24.2 million and cash flow of -$25.7 million. Following two quarters of net losses, Chiquita went earnings-positive last quarter. But that didn't translate into positive cash flow, primarily because the company's accounts receivable balance ticked up, so many of those sales haven't yet translated into cash hitting its bank account. I'm not worried, though: Chiquita's customers are mostly stable, credit-worthy businesses, and its receivables balance is still safely within its normal quarter-to-quarter fluctuation.
So what does it all mean?
This is a mixed bag of results for Chiquita, but frankly, the business is so volatile -- think wildly fluctuating banana prices and unpredictable tropical storm patterns -- that it would be imprudent to draw any hard conclusions from any single quarter. That said, there are three things I'll be keeping a close eye on in the coming months:
- Salad competition. Salad sales are declining because of private-label competition. I expected this, but I thought the declines would be only about 3% a year, not the 8% hit Chiquita took last quarter. Also, as the economy improves, private-label salad brands should become less appealing, but they appear to retain their market share as times get better. I'll have to reconsider my thinking.
- Banana price stability. Banana prices, as I said earlier, are notoriously volatile, especially over the past couple years as the number and severity of supply-disrupting storms have ravaged banana-producing latitudes. If that volatility keeps up, I'll be keeping an eye on Chiquita's ability to maintain its industry position in an irregular market -- especially versus primary competitor Dole (NYSE: DOLE ) , with whom Chiquita battles for dominant market share in most regions.
- Working capital accounts. One quarter of rising accounts receivable does not a problem make, but if Chiquita begins to have difficulty collecting from customers, I'll take notice quickly.
Chiquita is up 10.7% for the Young Gun Portfolio and is currently outperforming the market by about 3%. At $15.43, I'm not willing to add to our position, but I'm not ready to sell, either. The size of our portfolio means we own only 25 shares, but if you own more than 100 shares, I might consider writing covered calls to generate more income as we wait for our thesis to play out. Given current information, I'd likely be a seller in the $18 range, so if the covered calls strategy is up your alley, I'd consider that strike price as the starting place for your analysis.