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Shareholders of Chiquita Brands
I don't pay much attention to the short-term movements, but I do look to new information to strengthen or discredit my thesis. I recently did just that with the company's 2010 annual report.
Banana prices are slippery
Demand for bananas is quite steady. They don't go in or out of fashion, their taste and texture don't change, and their nutritional content stays the same. Banana supply, on the other hand, can be all over the map, thanks to hurricanes, floods, heat, cold, and a variety of other unpredictable weather events. Combine that with an inability to store the fruit for very long, and the result is that banana prices can bob around erratically.
With that in mind, excess supply lowered prices early in the year before storms drove prices higher later in the year. Chiquita realized the higher prices in North America, but not in Europe, where it has even larger market share. European Union import tariffs are to blame: Under the regulation, bananas from Latin America (where most of Chiquita's bananas are sourced) are hit with high tariffs while bananas coming from Africa and other countries get in scot-free. Fortunately for Chiquita, these tariffs affect Dole
Salads are getting richer
Our investment thesis in Chiquita was not about growth but about margins, and key was expansion in margins on salads the company sells under its Fresh Express brand. After flirting with outright unprofitability for years, the profit margin on salads jumped from -1.9% in 2008 to 5.3% in 2009, to a record 9.3% last year. This is just what I was expecting -- in my base case, I have salad margins eventually leveling out around 10%, though by the numbers, they may certainly go higher than that.
That the company has been able to improve the margins so rapidly is impressive, especially considering the recent popularity of private-label salads, which began selling well as people skimped on their grocery purchases in the darker economic times. I like that Chiquita, unlike some competitors, has refrained from chasing business by going into these low-margin salads.
Cleaning up the financials
Also as part of our thesis, we expected Chiquita to continue paying down its debt load, resulting in lower interest expenses and higher financial flexibility. That is exactly what we've seen, with the company paying off $30 million of its debt last year. Net debt, from a peak of $964 million in 2006, has now come all the way down to $478 million.
Chiquita also took in an extra $18 million in cash last year by selling a 51% stake in its European smoothie business to French food and beverage giant Danone (OTC BB: DANOY.PK). The deal was, in my opinion, a good one, because it gives Chiquita's fast-growing smoothies access to Danone's much more developed European distribution network.
What it all means
Erratic banana prices have Chiquita's stock price bouncing all over the place, but management is running the business just as I expected them to. Margins on salads are expanding, the debt level continues to come down, and the European banana tariffs are being phased out. The new information on Chiquita definitively strengthens my thesis, and I am happy to continue holding the stock as that thesis plays out.
The Fool owns shares of Chiquita Brands. The Motley Fool has a disclosure policy.
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