This Trio Is Taking the West Coast Drought in Stride

The severe West Coast drought hasn't made a dent in Chipotle Mexican Grill, Edison International, or Calavo Growers' growth, but that doesn't mean it won't.

May 12, 2014 at 2:34PM

Water is a key component of life, and the West Coast drought has caused its fair share of disruption. However, companies from Edison International (NYSE:EIX) to Chipotle Mexican Grill (NYSE:CMG) have managed to handle the strain without missing a beat.

Still a troubled region
The West Coast isn't out from under the shadow of the drought. For example, 45% of the Western United States has drought conditions that range from severe to exceptional. That number is 96% in water-starved California; but that difference shows why California-focused electric utility Edison International isn't too worried.

During Edison International's first quarter conference call, CFO Jim Scilacci specifically addressed the matter:

We've got about 1,000 megawatts of hydro in our system. Clearly, the capacity of hydro system will be down this year... We are heavily dependent on the Pacific Northwest and they are much closer to normal there as opposed to what happened here in California.



The company's GAAP earnings were notably lower in the first quarter, but that was because of one-time items such as additional writedowns for a nuclear plant closure. Excluding such items, Edison International's earnings were actually up 17%. Clearly, the company, which serves drought-ridden California, is taking the water shortages in stride.

So, too, is Calavo Growers (NASDAQ:CVGW). CEO Lee Cole noted in the company's first quarter press release:

...the industry is facing a cyclically smaller California avocado crop this year -- possibly only half the size of 2013. Owing to our vast Mexican avocado sourcing and packing capabilities to fill this expected California volume vacuum, Calavo anticipates not missing a beat to satisfy consumption, which is expected to grow again this year.

In fact, Calavo's fiscal first quarter (year ends October) earnings were $0.25 a share, up from $0.18 a year ago. A more than 20% top-line advance and improved margins were the driving force. So long as Calavo Growers can keep getting avocados at a reasonable price, from California or Mexico, this niche produce company will continue to ride the increasing domestic avocado consumption trend.

Hidden beneath the numbers
Chipotle Mexican Grill also posted good numbers. Like Calavo, it was able to get enough avocados to satisfy its customers' food preferences. Sales were up roughly 25%, and earnings advanced nearly 8% in the first quarter. The high-end fast-food chain was able to open 44 new restaurants.


Source: Public Domain, via Wikimedia Commons

However, a little digging shows that costs were up a notable 1.5%: "Food costs were 34.5% of revenue, an increase of 150 basis points driven by higher commodity costs. Higher commodity costs were primarily driven by inflationary pressures in beef, avocados, and cheese prices."

The thing about fast-growing restaurants like Chipotle is that expansion can cover up underlying weaknesses, like rising costs. And there's still notable demand at existing outlets, which saw comparable-store sales up more than 13%, to help soften the blow. "Restaurant level operating margin was 25.9% in the quarter, a decrease of 40 basis points from the prior year period. The decrease was driven by higher food costs."

Sure avocados are one thing hit by the drought, but California is the source of nearly half of the produce sold in the United States. In addition to avocados, California is also big in key Chipotle ingredients like lettuce and tomatoes. Keep an eye on Chipotle's margins.

Nothing to worry about yet
In the end, there doesn't appear to be anything to get excited about at Edison International, Calavo Growers, or Chipotle Mexican Grill. However, that doesn't mean you can sit back and stop worrying about the West Coast drought. With 100% of California still in drought conditions as we head into the summer months, there could still be trouble brewing under the (so far) calm surface.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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