Is Chiquita Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Chiquita (NYSE: CQB  ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Chiquita's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Chiquita's key statistics:

CQB Total Return Price Chart

CQB Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

(11%)

Fail

Improving profit margin

(856.7%)

Fail

Free cash flow growth > Net income growth

(122.6%) vs. (773.4%)

Pass

Improving EPS

(771.6%)

Fail

Stock growth (+ 15%) < EPS growth

(28%) vs. (771.6%)

Fail

Source: YCharts.
*Period begins at end of Q1 2010.

CQB Return on Equity Chart

CQB Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(803.9%)

Fail

Declining debt to equity

59.4%

Fail

Source: YCharts.
*Period begins at end of Q1 2010.

How we got here and where we're going
Things don't look good for Chiquita today. The banana-slinger earned only one out of seven possible passing grades, and even that lone pass was granted more on a technicality than on a genuine improvement. A big source of weakness is Chiquita's net income which has fallen far into negative territory over the past few quarters. Will Chiquita be able to find money in the banana stand? Let's dig a little deeper to find out.

In response to these recent quarters of depressing losses, cost pressures and internal churn, Chiquita underwent internal restructuring, and as a result, the company's share price has more than doubled in the past year. Chiquita earns 64% of its revenue from bananas alone, but consumers don't seem quite so enamored of the yellow fruit (it's actually a berry) of late -- and weak banana prices aren't helping, either.

However, Chiquita still managed to push its net income into positive territory with a $2 million bottom-line result in the first quarter of 2013, much better than the year-ago quarter's net loss. Chiquita's value chain restructuring might decrease sourcing and logistic costs, which will be necessary to drive margin expansion in the near future.

Going forward, Chiquita is trying to achieve annual cost savings of at least $60 million, an effort that will include job cuts and reduction or elimination of non-core divisions, and which has already resulted in the replacement of its CEO. By the start of 2015, Chiquita expects to achieve about 4% net margins in bananas, and 7%-8% net margins in salads. A rebound in banana futures (yes, that's actually a thing) will also help, but even after a year of price declines, banana prices aren't in a much different place than they were three years ago:

Central and South America Banana Price (US Import) Chart

Central and South America Banana Price (US Import) data by YCharts

New rules set out by the U.S. Food and Drug Administration could impact smaller niche food processors and farmers like Chiquita. All publicly traded companies will have to fulfill certain requirements for "product safety" and "preventive controls" within their facilities, which will add an extra cost of compliance, crimping already razor-thin margins. Even if there's money in the banana stand before taxes and regulations, there might not be once Uncle Sam takes his cut.

Putting the pieces together
Today, Chiquita has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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