Is Chiquita Appealing With These 2 Metrics?

Chiquita Brands International (NYSE: CQB  ) carries $733.7 million of goodwill and other intangibles on its balance sheet. Sometimes goodwill, especially when it's excessive, can foreshadow problems down the road.  Could this be the case with Chiquita?

Before we answer that, let's look at what could go wrong.

AOL blows up
In early 2002, AOL Time Warner was trading for $66.27 per share.

It had $209 billion of assets on its balance sheet, and $128 billion of that was in the form of goodwill and other intangible assets. Goodwill is simply the difference between the price paid for a company during an acquisition and the net assets of the acquired company. The $128 billion of goodwill in this case was created when AOL and Time Warner merged in 2000.

The problem with inflating your net assets with goodwill is that it can -- being intangible after all -- go away if the acquisition or merger doesn't create the amount of value that was expected. That's what happened in AOL Time Warner's case. It had to write off most of the goodwill over the next few months, and one year later that line item had shrunk to $37 billion. Investors punished the stock along the way, sending it down to $27.04 -- or nearly a 60% loss.

In his fine book It's Earnings That Count, Hewitt Heiserman explains the AOL situation and how two simple metrics can help minimize your risk of owning a company that may blow up like this. Let's see how Chiquita holds up using his two metrics.

Intangible assets ratio
This ratio shows us the percentage of total assets made up by goodwill and other intangibles. Heiserman says he views anything over 20% as worrisome, "because management might be overpaying for the acquisition or acquisitions that gave rise to the goodwill."

Chiquita has an intangible assets ratio of 36%.

This is well above Heiserman's threshold, and you should keep a close eye on just how the company is fueling its growth. It's also useful to compare it to tangible book value, which I explain below.

Tangible book value
Tangible book value is simply what remains after subtracting goodwill and other intangibles from shareholders' equity (also known as book value). If this is not a positive value, Heiserman advises you to avoid the company because it may "lack the balance sheet muscle to protect [itself] in a recession or from better-financed competitors."

Chiquita’s tangible book value is $85.7 million, so no yellow flags here.

 

Foolish bottom line
To recap, here are Chiquita Brands International's numbers, as well as a bonus look at a few other companies in its industry:

Company

Intangible Assets Ratio

Tangible Book Value (millions)

Chiquita Brands International

36%

$86

Dole Food

26%

-$300

Fresh Del Monte

17%

$1,296

Data provided by S&P Capital IQ

If you own Chiquita, or any other company that fails one of these checks, make sure you understand the business model and management's objectives. You can never base an entire investment thesis on one or two metrics, but there is a yellow flag here. I'll help you keep a close eye on these ratios over the next few quarters by updating them soon after each earnings report.

Fool analyst Rex Moore owns no companies mentioned in this article.

The Motley Fool owns shares of Chiquita Brands International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 04, 2012, at 7:07 AM, TigerPack1 wrote:

    Yeah, but...

    The company has been paying down debt and slashing long-term liabilities for many years, with net working capital today that is GREATER than the total market capitalization of owners in the stock market... http://finance.yahoo.com/q/bs?s=CQB

    With $100 million in cash flow annually, and a net long-term liability postion of just $400 million today (current assets minus ALL liabilities), the company's balance sheet is actually quite CONSERVATIVE for a brand name Food company.

    Plus, "tangible assets" are severely understated with plant and equipment, farm land, and warehouses held at cost on the balance sheet from decades ago! Chiquita owns 34,000 acres of land in Central America producing fresh fruits for Europe and America.

    Given any type of commodity inflation in the future (from all the money printing continuing daily on the globe) and a realistic "market" based value of its hard assets, Chiquita's liqudiation value is likely FAR ABOVE its stock price today!

    Dart throwing monkeys love bananas also, if given a choice between undervalued low-hanging fresh fruit vs. overvalued semiconductor or industrial products going into a recession.

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