bergamont/iStock via Getty Images There exists both a significant positive and a significant negative about buying into companies that provide commoditized products. In most cases, a commoditized product is one that will always have some demand for it as long as humans exist. This is the positive. But the negative is that many of the companies that operate in a commoditized field have to be price takers and, as a result, can see their fundamental performance fluctuate year over year as opposed to many other types of firms that can generate consistent growth. One player in the commoditized space, particularly one that focuses on providing fresh produce such as pineapples and bananas, is Fresh Del Monte Produce (NYSE: FDP ). Despite having shares that were trading at fairly low levels already, the company has exhibited significant downside in its share price in recent months. This underscores the risk of buying into a business that has a mixed operating history. But at the same time, shares are getting cheap enough that, if they keep falling, could result in some nice upside for investors moving forward. Conditions have improved
The last time I wrote about Fresh Del Monte Produce was in an article published in August of 2021. At that time, I called the company an interesting prospect. I acknowledged that shares of the business looked cheap. But I was underwhelmed because of its mixed operating history over the years. At the end of the day, however, I did claim that it might be a good prospect for investors who want to further diversify their portfolio. But I ultimately rated the company a ‘hold’. Since then, the business has performed worse than I would have anticipated. While the S&P 500 is down by 1.4%, shares of Fresh Del Monte Produce have generated a loss for investors of 17.6%. Author – SEC EDGAR Data Given this return disparity, you might initially think that something went horribly wrong for Fresh Del Monte Produce. But that’s not really the case. At the time of my prior article’s publication, we only had financial performance covering the first half of the company’s 2021 fiscal year. Today, we now have data covering the entire year . For the full 12-month period, the company generated sales of $4.25 billion. That represented a 1.2% increase over the $4.20 billion the company reported in 2020 and it would have been higher by 3% had it not been for an extra week the company had in 2020. Admittedly, this did mark a continued underperformance compared to the $4.49 billion the company had reported back in 2019. Clearly, demand has not made a full recovery since the pandemic has started to ease up, but when you consider that any growth is progress, the results don’t look all that bad.
While looking at revenue is important, looking at profitability is probably more important. And what a year it was for the business. After seeing profits drop from $67 million in 2019 to $49 million in 2020, the company saw a rebound in net income to $80 million last year. Having said that, I have not been a huge fan of pricing this particular business using its profits. I say this because profitability has been very volatile over time. Back in 2016, for instance, net income was as high as $225 million. Over the course of the following two years, even as sales grew by $483 million, net profits shrank to just $22 million.
A more appropriate measure of Fresh Del Monte Produce’s value should be cash flow. That said, this too has also been volatile, dropping from $332 million in 2016 to $169 million in 2019. In 2020, this metric improved slightly, growing to $181 million. But then, in 2021, it shrank to $128.5 million. Although this might look bad at first glance, if we adjust for changes in working capital, it would have actually risen from $144 million in 2020 to $160.3 million last year. Another important profitability metric to consider is EBITDA. Like the other profitability metrics for the company, EBITDA has been all over the map. But the good news is that it has been consistently positive in recent years. After dropping from $201.6 million in 2019 to $189.4 million in 2020, it then recovered some to $206.8 million in 2021. Author – SEC EDGAR Data Taking these figures, we can effectively price Fresh Del Monte Produce as it stands today. On a price-to-earnings basis, the company is trading at a multiple […]
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