Avocado toast may have become shorthand for millennial indulgences, but there's no question that avocado consumption has boomed in the United States. According to the U.S. Department of Agriculture, in the 20 years leading up to 2021, avocado consumption in the country tripled to nearly nine pounds per person per year.
Filling that demand hasn't been easy. It takes a long time to grow avocado trees, and U.S. avocado acreage has actually fallen during that time. As a result, imports, primarily from Mexico, have filled the gap. Prices for avocados have long been volatile, and according to the Producer Price Index, wholesale avocado prices have roughly quadrupled from their low in 2020.
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That might be a problem for consumers, especially fans of avocado toast and guacamole, but there's one company that's been able to capitalize on the boom. That's Calavo Growers (CVGW -1.39%), one of the world's biggest avocado growers. Buying the stock could be a good idea for avocado lovers to hedge against rising prices, but it could also pay off for any investor.
What you should know about Calavo Growers
Calavo sells other fruits including tomatoes and papayas, and makes prepared foods such as guacamole. However, most of its business comes from avocados. The company's leading position has driven strong returns for investors over its history although the stock price has come down substantially in recent years as costs have risen and its execution has declined.
Those problems have continued recently. Revenue declined 24% in the third quarter to $259.9 million even while gross profit improved as the company controlled costs in the and focused more on operational execution and customer service.
Prices also rose sequentially and progressively during the quarter, setting the company up for an improved performance in the fourth quarter. Avocado volume was up 5% in the quarter, showing unit sales moving in the right direction.
Calavo recently brought Lee Cole out of retirement to return as CEO. Cole ran the company from 1999 to early 2020, during which the stock returned well over 1,000%. He's 83 years old and agreed to run the company for three years with the goal of returning it to stable growth and shareholder value creation.
Why Calavo could be set up for a turnaround
Pandemic disruptions and poor leadership seem to have sunk the stock over the last few years, but there are signs the business could be ready for a comeback under Cole's guidance. He has also bought the stock multiple times, indicating confidence in a recovery.
The profitability improvement in the third quarter was impressive. The company breezed past bottom-line estimates even as top-line results missed the consensus due to the year-over-year decline in avocado pricing.
According to the Producer Price Index, avocado prices continued to rise through Calavo's fourth quarter, boding well for its upcoming results, which are due out later this month. In fact, analysts expect a strong recovery in Q4 and into 2024, buoyed by the recent price recovery and the improvements under Cole.
The rebound in avocado prices alone isn't a reason to buy the stock as prices are volatile and avocados are a commodity. However, the company should benefit from continuing growth in avocado demand as well as expected growth in its prepared segment.
Calavo's business previously peaked with an adjusted earnings per share of $3.02 in 2019. Getting back there isn't guaranteed, but the stock looks like a bargain if it can move in that direction -- it would be trading at a price-to-earnings ratio of 9.
Investors should continue to expect volatility in avocados and with Calavo, but the combination of the sell-off in the stock, rising prices, and the return of Lee Cole could give the stock significant upside potential. Keep your eye on the upcoming Q4 earnings report as that could be a catalyst for a rebound in the stock.
