This Share Buyback Plan Suspension Is Not Attractive

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

The market does not seem to be happy with Dole Food’s (NYSE: DOLE) recent decision of suspending its buyback. Its share price dropped nearly 6% right after the company announced that it would cease the recently announced $200 million share repurchase program to upgrade its own vessel fleet and acquire three new refrigerated container ships. Should investors buy Dole Food after this announcement? Let’s find out.

Business snapshot

Dole Food is a global fresh fruit and fresh vegetables manufacturer and distributor operating in two main business segments: fresh fruits and fresh vegetables. Most of its revenue, $3.14 billion, or 73.8% of the total 2012 revenue, was generated from the fresh fruit segment, while the fresh vegetables segment contributed more than $1.1 billion in revenue. The fresh fruit segment was also the biggest operating income contributor with nearly $103.5 million in operating income whereas the fresh vegetables segment produced nearly $24.84 million in operating profit.

A much better shape after business divestment

In the beginning of April, Dole Food announced that it completed a $1.68 billion sale of its package foods and Asia fresh produce business to Itochu. After the divestiture, Dole Food had a much stronger balance sheet. As of December 2012, the company had $887 million in equity, $460.75 million in cash, and nearly $573 million in long-term debt. The adjusted EBITDA from continuing operations came in at $145.8 million in 2012. Dole Food would book more than $227.8 million in sales and it would use more than $1.63 billion to repay debentures, notes, revolving credit facility, and term loan facilities. Dole Food expects that its 2013 adjusted EBITDA would be in the range of $150 million to $170 million.

What makes Dole Food more interesting is its ownership of 24,700 acres of lands in Hawaii. The company expects to get around $175-$200 million by divesting around 20,600 acres of land where it has no farming activity. Maybe, as the prospect of land sale is not clear, the company had to use amount earmarked for the share repurchase plan to address the capital expenditure issue. With an estimated adjusted EBITDA of $150 million for 2013, the market values Dole Food at around 10 times EV/EBITDA.

Peer comparison

Compared to its peers, Chiquita Brands International (NYSE: CQB) and Fresh Del Monte Produce (NYSE: FDP), Dole Food’s valuation is in between the two. Fresh Del Monte seems to be the cheapest. The market values Fresh Del Monte at only 7.7 times EV/EBITDA. While Dole Food has suspended its share buyback program, Fresh Del Monte authorized its own share repurchase program. Recently, Fresh Del Monte announced a three-year share repurchase program of around $300 million.

If the company completes this program, Fresh Del Monte will create a buyback yield of as high as 18.75% for its shareholders in the next three years. At its current trading price, investors can already get a decent dividend yield of 1.80%. In the near future, the increasing trend of maintaining good eating habits and a healthy diet would benefit Fresh Del Monte as more people turn to fresh fruit products.

Chiquita Brands has the highest valuation. The market values Chiquita more expensively than Fresh Del Monte and Dole Food, at 12.55 times EV/EBITDA. The company is in a restructuring process, focusing on cost reduction. Its new CEO, Edward Lonergan, has placed the margin target for banana sales at 4% and the margin target for salads at 7%-8% by 2015. The company expects to achieve at least $60 million per year in savings via streamlining, reducing jobs, and the divestment of several non-core businesses.

Its adjusted EBITDA came in at $39 million in the first quarter, much higher than $28 million in the first quarter last year. According to Barron’s, Janney Capital Markets believes that Chiquita Brands is worth around $12 per share.

My Foolish take

Dole Food is in a better shape after divesting its packaged food business and the Asia fresh produce business. Moreover, the company owns a good chunk of non-farming real estate in Hawaii, which was estimated at $170-$200 million. However, it would take time to liquidate those real estate holdings. With the recent suspension of the share buyback plan and a double digit EV multiple, I would not consider Dole Food for my portfolio at present.

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