Calavo Growers (NASDAQ: CVGW ) , the avocado, papaya, and tomato distributor, must have made analysts feel avocado green indeed. The company reported record results for the third quarter, with a gross margin and net income that surpassed any quarter in Calavo's history.
Analysts had lowered estimates by double digits after a disappointing second quarter gross margin contraction due to promotional discounts.
What were the analysts thinking, when avocado or salsa is on practically every casual dining menu ( Panera Bread, Subway, and certainly Chipotle Mexican Grill) in some form? The Wall Street Journal reported that Subway's avocado promotion alone increased foot traffic to the chain.
Trade publication Nation's Restaurant News summed it up best, "Avocado is in a sweet spot when it comes to food trends."
The new superfruit
CEO Lee Cole had reason to crow. The company posted nearly 20% revenue growth, as it promised a year ago.Calavo itself has seen an 165% uptick in consumption of the fruit since 2000. Sales, dividend, and EPS growth for the last five years were in the teens, with EPS growth at 17% and dividend growth at 13%, thanks to the super-nutrition benefits of the fruit.
Calavo's dividend, now at a ~2.40% yield, has grown 225% from 2002-2012 In the last decade, the company's sales and earnings have grown at rates of 8.5% and 9.4% annually, and its stock price has more than tripled. As of 2012, the company distributes 23% of the avocado supply to Canada and the US.
A price-to-sales ratio at .63 means you are paying less than the cost of an avocado for a dollar's worth of sales. Calavo's forward P/E, at 16.98, is reasonable for a small cap produce stock. The company markets for 1,600 growers in California and has alliances or joint ventures with growers in Chile, Mexico, and New Zealand.
Calavo operates in three reportable operating segments: Calavo Foods, which offers packaged fresh guacamole, hummus, and salsa; Renaissance Food Group (RFG), which packages fruits and vegetables as fresh ready to eat wraps, cut veggies, sandwiches, and fruit medleys, and Fresh Products which procures and processes produce for sale.
In 2012 the company added more capacity in Mexico. Calavo expects that this will help double its Asia-Pacific sales, specifically because of sales in Japan. (Avocado is a common ingredient in sushi). The company can now pack 600 million pounds annually.
An innovation that is already creating buzz is avocado halves with a fresh shelf life of 75 days thanks to cutting edge ultra-high pressurized technology.The company is moving into the cloud with its own fresh food technology platform company, Fresh Realm LLC. The platform will link fresh food producers to communities and food banks in a national ecosystem. Announced in March, it's too early to tell what effect, if any, this will have on the bottom line but it does show that Calavo's tech-savvy.
Not a lemon, after all
Calavo has a very symbiotic relationship with Limoneira Company (NASDAQ: LMNR ) . The two companies own each other's stock, and Limoneira's CEO, Harold Edwards, is on the Calavo board and vice versa.
Limoneira is another small cap produce company (market cap $297.29 million) but it is a grower, rather than a distributor. The company has significant land assets in California, but this is a more speculative stock than Calavo. Despite a 0.70% yield, it has a 3.76 price to sales ratio.
Two of Limoneira's three operating segments are Real Estate and Rental Operations. Over 90% of Limoneira's business is as a lemon, avocado, and fruit grower with 7,000 acres producing and second quarter agribusiness revenues of $22.3 million.It owns 1,300 acres of prime California property near, Los Angeles which it is currently developing into commercial, industrial, workforce housing, and residential housing. In this last quarter, the company also entered into an agreement with Cadiz for rights to plant 1,280 acres with lemons, and acquired Associated Citrus Packers gaining an additional 1,300 acres in Yuma, Arizona with Colorado River access.
In good news for Calavo, Limoneira's second quarter saw 50% growth in avocado sales. That second quarter saw significant reduction in debt, by $37.1 million. In the third quarter just reported September 9 the company further reduced long-term debt by $11.7 million and its LT debt now stands at $47.4 million.
The third quarter release also saw revenue increases in all three operating segments: 21% in Agribusiness,10% in Rental Operations, and a threefold increase in Real Estate development. Although the company guided for lower lemon and avocado prices, higher production leaves guidance reaffirmed.
The big banana
Fresh Del Monte Produce (NYSE: FDP ) is much larger at a $1.7 billion market cap. The international producer and distributor of produce, especially bananas, is trading at the lowest price to book of these at .89 (Calavo at 3.73 and Limoneira at 3.56) and the lowest trailing P/E of 13.40.
The company offers a 1.70% yield, at an easily sustainable payout ratio of 20%. Price to sales is also the lowest of these at .46. Its stock hit a 52 week high of $29.85 on September 9.
Fresh Del Monte competes with Calavo not only on avocados but also fresh cut convenience offerings, with Fresh Del Monte reporting a 7% increase in North American fresh cut sales. Fresh Del Monte also has a vibrant emerging market and global business, with second quarter net sales up 36% in the Middle East and stronger performance in Asia.
The Foolish takeaway
There is still risk with produce stocks despite a "burgeoning" demand for these companies' products, as was pointed out in Calavo's annual report of a tomato market freefall in 2012 due to Mexican oversupply. Similarly, Fresh Del Monte's gross margin took a second quarter hit due to a strike in Costa Rica forcing the company to source higher priced bananas in Ecuador, as well as unfavorable foreign currency transactions. Limoneira also saw smaller avocados due to weather.
Nonetheless, all three are benefiting from worldwide trends toward healthier eating. Of these, Calavo with its high yield and stake in Limoneira is a better bet than Limoneira alone. Fresh Del Monte is the value name, trading below book, and it has an emerging market growth kicker.
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