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Chiquita Brands: Don't Go Bananas over Cheap Valuations

November 16, 2012 | About:
Chiquita Brands International (CQB) is a leading international marketer and distributor of nutritious, high-quality fresh and value-added food products – from energy-rich bananas, blends of convenient green salads and other fruits to healthy snacking products. CQB markets its healthy, fresh products under the Chiquita and Fresh Express premium brands and other related trademarks. With annual revenues of more than $3 billion, Chiquita employs more than 21,000 people and has operations in nearly 70 countries worldwide.

Valuation

CQB is trading at 0.44x P/B, a 51% discount to its five-year average P/B of 0.90x. Its previous historical valuation lows were 0.53x P/B and 0.29x P/B in March 2009 and June 2012 respectively. In terms of earnings-based valuation multiples, CQB trades at 25.1x 12 months trailing EV/EBITDA.

Financial And Business Risks

CQB is highly geared with a gross debt-to-equity ratio of 82%. This is not helped by an interest coverage ratio of 0.70 and a quick ratio of 1.08. This does not take into account off-balance sheet obligations such as operating leases, pension and severance obligations and purchase commitments.

As at Dec. 31, 2012, operating leases and pension and severance obligations amount to $392 million and $96 million, respectively. The most significant off-balance item is purchase commitments amounting to $1.9 billion. Purchase commitments consist primarily of long-term contracts to purchase bananas, lettuce and other produce from third-party producers. The value estimated based on the current contract price is $1.9 billion, and the estimated volume CQB is committed to purchase until the next renegotiation date.

CQB faces new competition from a few major retailers that have begun to purchase a portion of their fruit directly from independent growers, or to contract directly for transportation of tropical fruit products. An increased commitment by retailers to manage their own supply chain could change industry dynamics in ways that reduce CQB's revenues and profitability.

Adverse weather conditions, such as floods, may affect bananas, which are typically grown in tropical lowland areas. As a result of flooding which affected some of CQB's owned farms in 2008 and 2009, CQB incurred approximately $33 million of higher costs, including logistics costs, related to rehabilitating the farms and procuring replacement fruit from other sources.

Business Quality and Capital Allocation

CQB is one of the largest banana distributors in the world and a major supplier of bananas in Europe and North America. In Europe, it is a market leader and obtains a price premium for Chiquita bananas. Management believes this price premium for CQB's bananas in Europe is due to the strength of the Chiquita brand and its reputation for consistent product quality, leadership in consumer marketing and category management, and innovative ripening techniques. CQB is also ranked second in the North Amrica market for bananas and imports more than one-fourth of the bananas in the market. CQB's arrangements with independent banana growers allow it to avoid incurring transportation costs to bring surplus fruit to market by paying a liquidation price, instead of buying its contracted volume of fruits.

CQB is focused on enhancing existing products and developing related products that appeal to consumers and customers. Some products such as Chiquita to Go bananas and healthy snacking products are sold through channels other than traditional grocery retail.

CQB's retail value-added salad products sold under the Fresh Express brand, is the market leader in branded retail value-added salads in the U.S., and it ships an average of 11 million fresh, ready-to-eat Fresh Express-branded salad bags to markets across the U.S. every week.

In August 2012, Chiquita announced a company restructuring supporting the goal of increasing profitability in its core businesses, with the aim of achieving least $60 million of annual savings. The restructuring plan is designed to reduce costs and improve its competitive position by focusing CQB's resources on the banana and salad businesses, reducing investment in non-core products, reducing overhead and manufacturing cost and limiting consumer marketing activities. In connection with this restructuring plan, CQB has eliminated approximately 300 positions worldwide. Effective from Oct. 8, 2012, Edward F. Lonergan was appointed president and CEO of the company. In Oct. 2012, CQB announced that it will exit the North American deciduous business after the end of the California grape season. The financial benefits of CQB's restructuring will be fully realized in 2013. Much of the restructuring is now complete, and CQB expects to recognize at least $8 million of savings from these activities in the fourth quarter of 2012.

CQB has not made dividend payments since 2006.

Conclusion

Off-balance sheet liabilities of $2.4 billion add significantly to the existing debt balance of $587.1 million on CQB's books. A weak balance sheet cannot be ignored, despite cheap valuations.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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