From the looks of it, the second quarter wasn't exactly the easiest for Motley Fool Hidden Gems recommendation Fresh Del Monte (NYSE:FDP). Demand for fruits and veggies wasn't a problem, but costs took a bigger-than-expected bite out of profits.
Overall sales climbed 21% for the quarter, with sales of fresh produce growing roughly 10%. Gross margins slipped a bit, but operating margins were down more significantly. As a result, reported net income wilted by about 22% for the quarter. The company invested in growing its prepared-food business, and the resulting doubling of SG&A expenses particularly hurt its results.
Unsurprisingly, there was considerable volatility below the waterline. Sales growth for bananas was solid, but higher costs picked away at this unit's gross profits. Pineapples were basically flat, while tomatoes were up modestly. Melons provided some of the juiciest results, coupling a 19% price increase with a 5% rise in volume.
Looking ahead, management offered guidance slightly below the existing consensus. It seems quite optimistic about plans to expand its fresh-cut business with several potential customers. As always, though, the outlook for produce pricing and input costs is unclear.
This is why Fresh Del Monte doesn't, and probably won't, get a multiple much above the low teens. In any given quarter, competitive produce pricing, input costs, weather, or disease can significantly affect the company's performance. Investors generally pay up for stable growers while punishing more volatile companies, so Fresh Del Monte's stock will likely always have something of an uphill climb with respect to valuation multiples.
That said, operational volatility and a commodity business don't automatically exclude Fresh Del Monte from being a successful stock. The company pays a nice dividend, and the balance sheet is not overleveraged with debt. What's more, the fresh-cut business is a legitimate growth opportunity, and current valuations don't suggest that expectations are particularly high here.
For investors who can live with the volatility and calmly cash their dividend checks, Fresh Del Monte may yet be worth a few sniffs and thumps before adding it to the cart.
For more on the food and fruit trade:
- Is Albertson's Fighting the Inevitable?
- A First Quarter Gone Bananas
- Going Bananas at Fresh Del Monte
Sometimes the sweetest produce is found at the bottom of the bin. Motley Fool Hidden Gems seeks out the solid, steady small-cap stocks the market overlooks. Try it free for 30 days, no strings attached.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
