Coral Gables, Florida-based Fresh Del Monte Produce (FDP, Financial) reported 1.4% first-quarter sales growth to $1.03 billion and an unimpressive 43% profit decline to $46 million – 4.5% margin vs. 8% the same period a year earlier.
The $2.72 billion company recorded 6.4% higher costs among other expenses which reduced its profitability by nearly half.
According to its news release, the decrease in Del Monte’s gross profit was principally due to higher fruit costs in its other fresh produce business segment, lower selling prices in the banana business segment and unfavorable exchange rates.
“We are very pleased with the progress we made in the first quarter, achieving key objectives that will enhance our diversified business platform.
“During the quarter, we also introduced new products, added customers in our global fresh-cut business and increased market share in our avocado product line. We faced a number of headwinds during the quarter, including a weak banana market, lower pineapple volume and a poor Chilean season that constrained our performance. As we move forward, we remain optimistic that investing in our diverse global operations, implementing product innovations and continuing to instill cost savings and efficiencies in all of our businesses, will deliver long-term value to our shareholders.” –Â Mohammad Abu-Ghazaleh, chairman and CEO
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Nonetheless, Del Monte shares dropped 13.3% at market close post-earnings announcement.
Valuations
Del Monte currently trades at a discount compared to its peers with earnings (P/E) multiple of 14.6 times vs. the industry median of 20.3 times, a price-book (P/B) value of 1.48 times vs. 1.75 times and a price-sales (P/S) ratio of 0.68 times vs. 1.07 times (GuruFocus data).
Del Monte also had a trailing dividend yield of 1.06% with a 16% payout ratio.
The producer had forward sales and earnings multiples of 0.65 times and 14 times having used average 2017 sales and earnings-per-share expectations.
Total returns
Investors who had Del Monte shares this year experienced 11.5% total losses compared to those who had Standard & Poor's 500 index, which provided 7.9% total gains (Morningstar data). In the past five years, though, Del Monte outperformed the broader index with 18.4% vs. 14.3%.
Fresh Del Monte Produce
According to filings, the company’s legal name is Fresh Del Monte Produce Inc., and its commercial name is Del Monte Fresh Produce. As of December, the Abu-Ghazaleh family directly owned approximately 35.6% of Del Monte.
Del Monte markets its products worldwide under the Del Monte® brand, a symbol of product innovation, quality, freshness and reliability since 1892.
Further, Del Monte sources its fresh produce products (bananas, pineapples, melons, tomatoes, grapes, apples, pears, peaches, plums, nectarines, cherries, citrus, avocados, blueberries and kiwi) primarily from Central and South America, Africa, the Philippines, North America and Europe.
The company sources its prepared food products primarily from Africa, Europe and the Middle East.
Del Monte then distributes its products in North America, Europe, Asia, the Middle East, Africa and South America.
In 2016, Del Monte derived 55.4% or $2.22 billion of total sales in North America, 16.8% in Europe, 14.2% in Middle East, 11.9% in Asia and 1.7% from other remaining countries.
Del Monte’s operations are aggregated into business segments on the basis of its products: bananas, other fresh produce and prepared food.
Bananas
In the first quarter, banana sales fell by 2.9% to $445 million – 43% of total unadjusted Del Monte sales –Â and delivered a gross profit margin of 7.9% vs. 10.6% in first-quarter 2016.
Other fresh produce
Other fresh produce includes pineapples, melons, nontropical fruit (including grapes, apples, pears, peaches, plums, nectarines, citrus, kiwis and blueberries), avocados, fresh-cut products, other fruit and vegetables, a third-party ocean freight business, a plastic product and box manufacturing business.
In the first quarter, sales in the division grew 5.3% to $506.2 million –Â 49% of total unadjusted sales –Â with gross margin of 9.6% vs. 16% in first-quarter 2016.
Prepared food
Prepared food includes prepared fruit and vegetables, juices, beverages, snacks, poultry and meat products.
In the first quarter, sales in the division grew 3.2% to $81 million and delivered 19.4% gross margin (most profitable among all segments) vs. 18.8% in first-quarter 2016.
On average, three-year sales growth was 2.9% and profit margin was 3.6% (Morningstar data).
Cash, debt and book value
As of March, Del Monte had $26 million in cash and cash equivalents and $267.4 million in debt with a debt-equity ratio of 0.14 times vs. 0.16 times the year-earlier quarter.
As observed, overall debt for the period has declined by 4.6% in the recent quarter while total shares outstanding grew by 0.56% to 51 million. Also, 9.63% of Del Monte’s $2.71 billion of assets were goodwill while having had a book value of $1.84 billion vs. $1.76 billion the year prior.
Cash flow
In the first quarter, Del Monte’s cash flow from operations declined by 64.5% to $33 million;Â in addition to profit decline, the company experienced higher cash outflow in receivables and inventories.
Capital expenditures were $35.6 million leaving Del Monte with (negative) $2.6 million free cash outflow vs. $58.8 million in first-quarter 2016.
Despite the negative free cash outflow, Del Monte provided $28.7 million in dividends and share repurchases –Â including distributions to noncontrolling interests, stock options exercised. On average, 101% of Del Monte free cash flow was provided as dividends and share repurchases in the past three fiscal years.
In the recent quarter, the company has spent $17.5 million to buy 303,300 shares as it paid an average price of $57.61 per share for its recent buyback program compared to the recent market price of $53.53.
Del Monte has $184 million left to spend in its $300 million buyback program initiated in the summer of 2015.
Also, Del Monte took in $34.7 million in debt, net payments in the recent quarter.
Conclusion
Del Monte experienced lower profitability in its major segments –Â bananas and other fresh produce (92% of total unadjusted sales) –Â while banana sales have been on a decline since fiscal 2015. The company also recorded higher costs that contributed to lower overall profits.
Del Monte also exhibited lumpy (inconsistent) profit levels in recent fiscal years despite steady sales growth therefore identifying the probable cyclical nature of its business.
Nonetheless, the fresh goods producer demonstrated acceptable levels of debt in its balance sheet and generous payouts –Â dividends and share repurchases –Â to its shareholders.
Two analysts have an average target price of $70.3 –Â a significant 31% upside from the share price of $53.53 (at the time of writing).
Using three-year sales average and earnings multiple prior to applying a 20% margin would indicate a value of $1.9 billion or $36 per share.
In summary, Del Monte is a pass despite having an estimated value of $59 per share.
Disclosure: I do not have shares in the company mentioned.
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