Alyce Lomax and W.D. Crotty love two Motley Fool Hidden Gems selections -- RedEnvelope and Fresh Del Monte. While Tom Gardner's Gems recommendations are up by an average of 31% since the newsletter's inception versus a 1% S&P 500 gain (calculated conservatively using the arithmetic mean), these selections have not been barn-burners for Tom. Fresh Del Monte is beating the market by five percentage points. And, get this, RedEnvelope is losing to the market by 39 percentage points. It's been Tom's worst selection to date. Why are Alyce and W.D. fond of these companies? Read both articles and then vote for which company you think has more upside.

Another epic duel and what do I select? Instead of the world of high technology, I'm going with, well, food. I must be hungry. Waiter!

Fresh Del Monte Produce (NYSE:FDP) packs more than 6.5 billion pounds of fresh fruits and vegetables annually. It is the world's top marketer (50% market share) of pineapples, the top marketer of branded melons in the U.S. and U.K., the third-largest marketer of bananas, the leading year-round marketer of branded grapes, and the premier re-packer of branded tomatoes in North America. Add in potatoes, onions, strawberries, citrus, apples, pears, peaches, plums, nectarines, and cherries (to name most), and you see the diversity.

The company is vertically integrated, meaning it grows, packages, and distributes its produce. A substantial portion of the products is grown in Central and South America and the Philippines, although some are also sourced from North America, Asia Pacific, Europe, and Africa. The company owns 40 refrigerated oceangoing vessels to control quality as it transports its products.

What's so exciting?
Fresh Del Monte offers growth (no pun intended). Consider that from 1992 to 2002, fresh pineapple imports increased by 226% in North America. The company expanded market share (and really juiced profits) with the 1996 introduction of its Gold Extra Sweet pineapple. Product innovation will continue with the 2006 introduction of the Honey Gold pineapple. Also expect significant research into melons to lead to some breakthroughs in cantaloupes. I am hungry. Where is that waiter?

The fresh-cut produce market, estimated at $11 billion in the United States alone, is one of the fastest-growing categories in the fresh produce segment and is expected to grow to approximately $24 billion by 2006. That's strong growth, and Del Monte, with $2.6 billion in sales, is making acquisitions to expand its presence.

And speaking of acquisitions, management just announced a blockbuster, saying it will buy Del Monte Europe -- a company with $370 million in sales and the perpetual, royalty-free license to use the Del Monte brand for processed and/or canned food products in more than 100 countries throughout Western, Central, and Eastern Europe, Africa, and the Middle East.

Having the Del Monte name to leverage in 100 countries is certainly strategic -- but so is the ability to produce canned goods, which, because of their shelf life, offer more stable earnings.

Add it up. The company is small compared to the markets it competes in, there is a proven ability to grow, and it has well-focused international growth plans. Yes, this is the food business we're talking about, but profitable growth is what makes for interesting investments.

How much growth is possible?
Ask yourself this question: Are you consuming the recommended five servings a day of fresh fruit and vegetables? Good, if you are. But, for the many who are not, any shift to healthier eating will greatly benefit Fresh Del Monte.

While Fresh Del Monte dominates pineapples, it has room to grow in other fruit and vegetable lines.

The horn of plenty is found at the bottom line, too. Consider that Kraft Foods (NYSE:KFT) enjoys high margins on its snack foods. Fresh Del Monte Produce has its high-margin snack line as well: branded fresh cut fruit sold at grocery stores. The difference is that Fresh Del Monte's business is not mature.

Consider marketplace changes, too. Large national chains like Wal-Mart (NYSE:WMT) want suppliers that can serve all their needs, with recognized brands, on a national basis. Fresh Del Monte is certainly uniquely positioned already to meet this need.

So, how much growth is possible? The answer is a lot more than the 9.2% annual revenue growth and 23.9% annual earnings growth the company has averaged over the last five years. Consider too that the company's highest price-to-earnings ratio over that period was 18. The P/E is 8 today. There is a lot of P/E growth possible without making the stock expensive by market standards.

The financials
Fresh Del Monte has excellent profit margins of 7.8%, making the 2.5% margins at banana-heavy Chiquita Brands (NYSE:CQB) look downright bellyache sickly.

One measure that attracted Tom Gardner to Fresh Del Monte was free cash flow (FCF). Although weak banana prices (bananas were 39% of sales in 2003) are hurting 2004 margins, the company will still end the year free-cash-flow positive.

The company likes its organic (no pun intended) growth prospects so much, it is doubling capital spending. It also returns profits to shareholders, paying a juicy 3% dividend.

The risks
Fresh Del Monte, No. 3 in banana market share, has to stay competitive in this volatile (and often low-profit) commodity. The banana is the key to supermarket produce departments because it offers high turnover and high margins for the retailer.

Don't expect Fresh Del Monte, Chiquita, and privately owned Dole to overcome their principal banana problem -- oversupply. Bananas are easy to grow, have a short growing cycle, and are available all year. Fresh Del Monte, through overall diversification and a move into higher-margin value-added products, hopes to lessen the long-term impact of this fruit on its operations.

With a commanding 50% market share in pineapples, the company is facing increasing competition in premium pineapples. The introduction of the Honey Gold is the key to maintaining and growing market share here.

Supermarkets may discontinue the outsourcing of produce to national companies and try to focus more attention to local companies. The trend, though, is for rising safety regulations and the supermarket's desire for more value-added products to drive business to companies like Fresh Del Monte.

The Del Monte canned food brand name in the United States is owned by Del Monte Foods (NYSE:DLM). There is always a risk that consumers will confuse the two Del Montes if there are ever newsworthy problems.

The investment case
One quick comment on RedEnvelope (NASDAQ:REDE). Sales growth over the last 52 weeks is 13%. Big deal! Even worse are the profit margins -- a negative 4.5%.

Fresh Del Monte Produce is growing, has 7.8% profit margins, and is producing (pun intended) free cash flow. Yes, the banana market is soft (oh, those puns!). But, the stock is selling for 10 times 2004 earnings estimates and eight times 2005 estimates. That's cheap -- and it comes with a 3% dividend.

Still not convinced? Grocers, retailer/grocers like Wal-Mart, and even protein producers like Tyson Foods (NYSE:TSN) all have significantly lower profit margins and revenue growth, yet sell at significantly higher P/E ratios. Fresh Del Monte Produce is a Hidden Gem that is ripe for investment.

Next: Read Alyce Lomax's Can't Lick RedEnvelope and then vote.

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Fool contributor W.D. Crotty does not own stock in any of the companies mentioned. The Fool is investors writing for investors.