Yesterday, Fresh Del Monte Produce (NYSE:FDP) (not to be confused with food giant Del Monte Foods (NYSE:DLM), a major international producer of fresh fruit and vegetables, reported mixed results for the fourth quarter of 2003.
Fourth-quarter sales were $578.7 million, an increase of 18.7% over the same quarter a year ago, with recent acquisitions contributing about $60 million. However, net income was $22.8 million, down from $35.2 million last year.
A one-time sale of a subsidiary in the 2002 fourth quarter contributed $4 million so the normalized net income was $31.2 million. Still this quarter's net margin has been considerably squeezed to 3.9% from last year's normalized net margin of 6.4%.
The annual figures look considerably better. Sales improved from $2.1 billion to $2.5 billion, a 19% increase, and net income from $195.2 million to $226.4 million. Allowing for one-time items, the normalized net income was $209.2 million for an increase of 7.2% over 2003. Net margins declined to 8.4% in 2003 from 9.3% in 2002.
In the earnings conference call, Fresh Del Monte cited many reasons for the lower margins, chief among them the acquisition of Standard Fruit and Vegetable Company. This acquisition is part of Fresh Del Monte's diversification strategy to add more non-tropical fruits and vegetables, which carry lower margins. Although not a significant contributor in 2003, Country Fresh Produce was also acquired in mid-December. In addition to diversifying Fresh Del Monte's product line, these two companies brought significant distribution assets to the table.
These acquisitions will help Fresh Del Monte compete with the recently privatized Dole Food Company and Chiquita Brands International (NYSE:CQB). Fresh Del Monte believes that major retailers and fast-food chains are increasingly looking towards having fewer suppliers for their fresh whole fruits and fresh cut fruits. I noted that Starbucks (NASDAQ:SBUX) is increasing the number of locations serving Fresh Del Monte fresh cut fruit, and that Wendy's (NYSE:WEN) has the fresh cut fruit on trial. The increase in higher-margin fresh cut fruits is one of the keys to Fresh Del Monte's future earnings growth.
In the conference call, I found it refreshing (now, if you really want refreshing try Fresh Del Monte's "Del Monte Gold Extra Sweet" pineapple) that the CEO Mohammad Abu-Ghazaleh refrained from offering 2004 earnings guidance, preferring to focus on business strategy.
He may not have offered guidance for 2004, but analysts have estimated earnings of $3.65 per share, which is essentially no growth for 2004. Interestingly, the lowest five-year analyst's estimate is for 9% earnings growth, so accelerated growth is expected from 2005 onwards.
Based on last night's closing share price of $26.02, Fresh Del Monte appears undervalued with a price to earnings ratio (P/E) of just 7.1. Sure, a business that is largely dependent on weather can be considered cyclical (check Dave Marino-Nachison's 2001 article on Fresh Del Monte's increasing margins), and consequently, the P/E will never match that of a Microsoft (NASDAQ:MSFT), but it is not unreasonable to expect a P/E of 10 once any earnings growth re-appears.
Using a discounted cash flow analysis, the company appears just as undervalued. With a conservative earnings growth rate of just 3%, approximately equal to the long-term rate of inflation in the U.S., I would place the current intrinsic value at between $31 and $38. Even at the lower figure, Fresh Del Monte is undervalued and any return to growth would significantly increase my valuation.
A mixed fresh fruit salad? Certainly an investor rarely likes to see reducing profit margins, but at this low valuation and a reasonable prospect of a return to even a modest earnings growth in 2005, I see this as one of the most undervalued opportunities out there today.
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Motley Fool contributor Philip Durell, otherwise known as admiraltroll on the Fool discussion boards, owns no shares of Fresh Del Monte and welcomes your feedback via email.
