Keeping It Green?: An Earnings Postmortem for Fresh Del Monte Produce

Five-star CAPS rated global produce giant Fresh Del Monte Produce  (NYSE: FDP  ) was reported third-quarter earnings on Oct. 29 but disappointed badly and sold off 10.7%. The quarter before it had trounced expectations and was trading at 52 week highs before the earnings report.

What happened?
In one word, bananas.

An oversupply of bananas industry-wide caused that segment's gross profit to decline to $1 million from $12 million in the year ago quarter as unit costs increased 12% but sales volume only increased 3%.In North America banana margins were affected by what CEO Mohammad Abu-Ghazaleh called "a very competitive banana market in the US."

According to Abu-Ghazaleh, competitors "irrationally" discounted banana prices to increase volumes despite increased fruit procurement costs. He added,"The increase in [banana] costs really comes from independent or third party growers and that is a trend that is continuing year over year."

Banana supply issues have been a continuing concern. Gross margin had already taken a hit in the second quarter due to a strike in Costa Rica, forcing the company to source higher-priced bananas in Ecuador.

This vertically integrated international producer and distributor of produce, especially bananas, pineapple, and avocados, and fresh-cut convenience offerings, had surprised on both the top and bottom lines in July earning $1.0 billion in revenue, higher than the expected $955.6 million. Earnings per share at $1.02 beat the predicted $0.81.

This time around the only real bright spots were fresh-cut convenience products with an increase of $15 million in total sales year over year and the avocado and tomato segments with volume increases of 25% and 20%, respectively.

Analysts expected third-quarter diluted EPS of $0.28 and got $0.11 instead. Net income declined significantly to $6.4 million from $23.5 million year over year.

Still under-performing
Despite a now low industry trailing earnings multiple of 13.71 and 1.7% dividend yield, the stock has underperformed the S&P 500 index this last year. The price-to-sales ratio is low at 0.48. It had traded slightly under book before this quarter with a book value per share of $33.04.

Fresh Del Monte may have strong insider conviction with CEO Mohammad Abu-Ghazaleh owning 5.3 million shares and combined members of the Abu-Ghazeleh family holding 33.7% of shares.However, produce companies have paper-thin margins; Fresh Del Monte's net profit margin is only 3.6%, still higher than the five-year industry average of 2.1%.

Greener pastures?
The company has a more widely known but smaller competitor, Chiquita Brands International (NYSE: CQB  ) , that has one-third the market cap at $524.3 million of Fresh Del Monte at $1.5 billion. Yet, Chiquita Brands has outperformed the S&P 500 and is the big banana producer in North America.

Chiquita's stock out-performance is partly due to more newsworthy catalysts: a co-sponsorship of Universal Pictures' movie Despicable Me 2, a huge restructuring plan just initiated, which Chiquita expects to generate $60 million in annual cost savings, and stated ambitious goals of 4% banana margins and a 7%-8% margin for its packaged fresh salads by 2015.

Nonetheless, Chiquita Brands' earnings have been disappointing. The Fresh Del Monte banana numbers bode ill for future earnings reports for Chiquita Brands.

Based on avocado consumption trends and Fresh Del Monte's strong avocado sales the best bet may be small-cap rival Calavo Growers (NASDAQ: CVGW  ) .  Zacks now rates it a Strong Buy. Calavo Growers operates in three reportable operating segments: Calavo foods packaged fresh guacamole, hummus, and salsa; Renaissance food group fresh ready to eat wraps, cut veggies, sandwiches, and fruit medleys, and fresh products, which procures and processes produce for sale.

Calavo Growers' dividend, now at a 2.2% yield, has grown 225% from 2002-2012. In the last decade, the company's sales and earnings have grown at respective 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.

Calavo Growers reported record results for the third quarter, with a gross margin and net income that surpassed any quarter in the company's history. Revenue also grew 27% year-over-year.

Looking forward
US banana-consumption trends have been declining as fellow Fool Alex Planes pointed out. However, Fresh Del Monte noted on the call it is seeking to acquire more of its own banana and other fresh produce production and rely less on these independent growers. No timeframe was given for these plans, however.

The company is very dependent on emerging market suppliers, especially its fresh produce, from Central America and South America, Africa, and the Philippines. This quarter the company also had problems with grapes from Ecuador and gold pineapple sourcing in the Phillippines.

The only recent news on acquiring its own production facilities was the acquisition of 7,200 acres of land, packing houses, and farm equipment in Florida and Virginia for tomato production, not exactly a needle mover even if the company is the leading repacker of tomatoes in the US.

The Foolish takeaway
Of these small-cap produce companies, Fresh Del Monte may now be undervalued on this sell off. Margins could improve with more of their own produce sources but the company provided no clear time frame. Calavo Growers, already riding high on the growing avocado trend and  Fresh Del Monte's avocado earnings is a much greener pasture to visit. 

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(NYSE: FDP  )


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