Betting on This Turnaround With Nearly 40% Upside Potential

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since the beginning of the year, Chiquita Brands International (NYSE: CQB) has experienced some volatility. Its stock price dropped from $8.25 per share to only $6.10 per share in March 4, then it bounced back to more than $7.20 at the time of writing.

Interestingly, in the middle of March, Chiquita’s president and CEO purchased 50,800 shares of the company at an average price of $7.86 per share. Chiquita is also in the portfolios of several successful investment managers, including Paul Tudor Jones, Steven Cohen and Jim Simons as of the end of 2012.. Should investors consider Chiquita a buy at its current price?

Business snapshot

Chiquita, originally incorporated in 1899, is one of the leading international distributors of bananas and other fresh produce under its namesake brand in around 70 countries. It also distributes Fresh Express packaged salads.

U.S. Chiquita operates in three main business segments: bananas, salads and healthy snacks, and other produce.

In 2012, 66% of total revenue, or approximately $1.9 billion, was generated from the bananas segment while salads and healthy snacks contributed around $953 million in sales. Other produce only brought $140 million in revenue.

Out of the three divisions, only the bananas segment was profitable. It produced 2012 operating income of $77 million, whereas the salads and healthy snacks and other produce segments generated losses of $218 million and $18 million, respectively.

The loss in the salads and healthy snacks segment in 2012 was mainly due to a goodwill and an impairment charge of $180 million relating to Fresh Express. In 2012, Chiquita’s net loss came in at -$405 million, or -$8.79 EPS. However, the operating cash flow stayed positive at $33 million.

High leverage with huge goodwill and intangibles

What makes investors more worried is the company's overly-leveraged capital structure. As of last December, it had $370 million in total stockholders’ equity, $51 million in cash and more than $600 million in both long-term and short-term debt.

However, the company has refinanced to move most of its debt maturities to the year 2021. Furthermore, Chiquita booked as much as $540 million in both goodwill and intangible assets. Consequently, its tangible book value was negative at -$170 million.

New CEO with the restructuring effort

Recently, new CEO Edward Lonergan has positioned the company to be a low- cost producer with business restructuring and cost reduction. He set the margin target at 4% for the bananas segment while the profit margin target salads was around 7% to 8%.

EBITDA might rise to $175 million, much higher than the $59 million achieved last year. Lonergan commented that he has seen the results he expected from the restructuring. He said:

“We'll continue to drive cost out of the value chain to leverage the velocity of advantages of our brands with the right value proposition to the customer and the consumer. We did a lot of pairing in 2012 and while we have a few more businesses to exit in 2013, we do not expect that to be accompanied by material cash outlay."

Peer comparison

At $7.20 per share, Chiquita is worth $336.4 million in market capitalization. The market does not seem to value the company cheaply, at about 12.5 times EV/EBITDA. Compared to its peers, including Dole Food (NYSE: DOLE) and Fresh Del Monte Produce (NYSE: FDP), Chiquita’s valuation stays in between.

Dole Food, with a long history dating back to 1851, is a global leading producer and distributor of fresh fruit and fresh vegetables. It operates in two business segments, including fresh fruit and fresh vegetables. The fresh-fruit segment generated $3.1 billion in revenue, while the fresh vegetable segment had more than $1.1 billion in revenue.

Recently, the company completed its $1.7 billion sale of the packaged-foods segment to Itochu. After the sale, Dole expects to have a much stronger balance sheet with a post-transaction net debt/ adjusted 2013 EBITDA of around 2.5. As a result, Dole will benefit greatly from the huge reduction in the interest expense.

Moreover, the company has recently set the rate for refinancing its loans of around $625 million. These loans, due in seven years, will pay interest at around 3% to about 3.2% more than the LIBOR rate. 

At $10.40 per share, Dole Food is worth $922.8 million in market capitalization. The market values Dole Food at as much as 20.6 times EV/EBITDA. Even with a much stronger balance sheet, a recent high EV multiple might restrain investors from initiating a long position in Dole Food at its current price. 

Fresh Del Monte Produce (NYSE: FDP) is the largest company among the three, with around $1.6 billion in total market cap. Fresh Del Monte is a global sourcing, transportation and marketing of fresh-cut produce in different areas of the world, including Europe, the Middle East and Africa.

Recently, Fresh Del Monte has won a fruit-licensing battle with Del Monte Foods, and was awarded more than $13 million. As more and more consumers realize the benefits of eating healthy and maintaining a good diet for a better health, an increasing number of consumers will turn to fresh fruit products. This consumer trend might affect Fresh Del Monte positively in the near future. 

In 2012, it generated around $3.4 billion in revenue and $143.2 million in net income, 54.8% higher than the net income in 2011. The higher net income was due to much lower costs of good sold, declining SG&A expenses and falling asset- impairment charges.

At around $27 per share, Fresh Del Monte has the cheapest valuation at only 7 times EV/EBITDA. Furthermore, investors could get a dividend yield of 1.9% while both Dole Food and Chiquita do not pay any dividends.

My Foolish take

Chiquita could be considered an opportunistic stock for investors to bet on the company’s turnaround effort. If the EBITDA reaches $175 million, with only 7 times EV/EBITDA valuation, Chiquita’s EV might reach $1.2 billion, or $10 per share, a 38% from its current trading price. Barron’s, Johnathan Feeney of Janney Capital Markets is more bullish, thinking that Chiquita is worth around $12 per share.


Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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