Fresh Del Monte Looks Ripe For The Picking At 0.64x Book Value

Summary

Earnings at Fresh Del Monte have been under pressure in recent quarters due to cost pressure, leaving the company trading near 52-week lows and only 0.64x book value.

The company’s current 2.44% dividend yield needs to be taken into perspective with the 2.0% average share repurchase rate over the past decade for a total shareholder yield of 4.44%.

Fresh Del Monte is a great hedge to inflation with its 61,000 acres of owned plantations and +125 year history.

biffspandex/E+ via Getty Images Shares of Fresh Del Monte ( FDP ) are looking ripe for the picking near 52-week lows and trading at 0.64x book value. Earnings at the company have been under pressure in recent quarters due to significantly higher input costs and labor shortages. However, Fresh Del Monte’s land and production capacity across the globe offer a great long-term hedge to inflation and margins are likely to recover in my opinion. Recently the company announced price increases to consumers to ease some of the cost pressures seen recently. Data by YCharts The drastic fall in the company’s stock price in the past month is due to the latest Q3 net income falling to $1.3 million due to cost pressures compared with $17.4 million in the prior-year period. While sales in Q3 increased 1.5% to $1,004.8 million compared with $989.7 million in the prior year, COGS increased 3.9% to $955.9 million from $920.2 million.

However, taking a longer-term perspective as this article will explore, Fresh Del Monte remains competitively placed in the food industry and conservatively leveraged. At the company’s current valuation level and relative to the expensiveness of the rest of the market, Fresh Del Monte’s shares look like a good addition to my portfolio and I plan to buy more. An Introduction to the Company

Fresh Del Monte has a long history dating back to 1886, and over the years, has established itself as a household brand that is known for quality, originally arising from its canned produce. The company is a global vertically integrated producer, transporter, marketer, and distributor with a presence in over 90 countries through its 37,600 employees globally.

While Fresh Del Monte’s main market is North America (62%) and its main product is bananas (38%), the company is well diversified across other markets and products as can be seen below. As of Q3 2018, the company owned 46 distribution centers worldwide, 25 fresh-cut operations, and 12 shipping vessels, as well as owned 61,000 acres of land, with a further 42,000 acres leased. In 2020, 45% of Fresh Del Monte’s produce was grown on company-controlled farms. A Profitable and Growing Business

Being a vertically integrated fresh fruit company that is active in most parts of the value chain does not automatically mean that the company is highly profitable, as return on equity (ROE) has averaged only 4.9% over the past decade. However, readers of my articles will know that ROE by itself is not an investment thesis. What matters is what investors are paying for that equity in a metric I call Investors’ Adjusted Return on Equity . At only 0.64x book value, investors are currently getting a nice discount on Fresh Del Monte’s equity for an adjusted ROE of 7.6% before considering growth and inflation. On the growth side, book value per share has grown from $29.40 in 2011 to $38.08 in the trailing twelve-month period, which, when combined with the dividends paid out from equity, has averaged growth of 4.2% annually. As can be seen from the graph above, profitability sometimes takes a hit, with rising production costs not being passed along to consumers instantly as previously mentioned. That being said, Fresh Del Monte has been through hard times before and the company has emerged just fine, as its 125+ year history indicates. Financial Leverage and Share Repurchases

Financial leverage at Fresh Del Monte remains quite conservative at only 1.87x currently and with interest coverage at 5.71x, even in the current operational rough patch over the past few months. Before the company’s acquisition of Mann Packing in fiscal 2017, which added $344.8 million of debt to the balance sheet, financial leverage was 1.57x and interest coverage was a very comfortable 23.5x operating income. Being a tight margin cyclical company, it seems, in my opinion, that management knows Fresh Del Monte needs to stay conservatively leveraged in order to withstand another 125 years of operations. Since 2010, the company has bought back an average of 2.0% of its outstanding shares a year, with total […]

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