Motley Fool Hidden Gems
recommendation Fresh Del Monte Produce
The EU wants to protect banana imports from former colonies such as Cameroon and Ivory Coast. So far, the World Trade Organization has twice ruled against the EU's proposed tariffs. The latest EU proposal is supported by Fresh Del Monte, but it's opposed by Chiquita Brands
Fresh Del Monte now finds itself in an interesting situation. Two weeks after supporting the EU tariffs, it warned its shareholders about weaker fourth-quarter earnings, caused partly by weak banana prices on higher-than-expected banana volume from the Philippines, Japan, and Korea. In that light, the latest WTO food fight might be a blessing in disguise. If a WTO ruling once again forces the EU to reduce its tariffs, Fresh Del Monte could benefit handsomely.
Any WTO or EU action won't affect last week's earnings downgrade, because those tariffs aren't due to take effect until the first quarter. Still, Fresh Del Monte is experiencing volume weakness in pineapples and price weakness in bananas. For the current quarter, analysts expected the company to earn $0.36 a share. Now they predict $0.09, although results could be as low as zero cents. That's not a pretty picture, and even with analysts' estimates for robust earnings of $2.23 per share, there's no reason to assume that next year will look significantly better.
For now, investors would be wise to remember that Fresh Del Monte is in a commodity business, with the associated risks of weather, governmental actions, and boom-bust commodity prices. Fresh Del Monte has sounded a warning, and any positive news from the EU will be welcome for 2006.
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