A Juicy Food Company With Room to Run

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

Most food producing companies are usually fairly valued, because of their stable demand/supply characteristics especially during economic downturns. Screening the large universe of food companies, it is often hard to find a good bargain.  Fresh Del Monte Produce (NYSE: FDP) happens to have a lot of bang for the buck.

Fresh Del Monte is a leading global producer, marketer and distributor of fruits, vegetables and prepared foods including fresh cut fruits, canned fruits, poultry, ice cream, frozen fruits and beverages in more than 100 countries. It is the number one marketer of pineapples and the third largest marketer of bananas worldwide. Fresh products are obtained from company-controlled farms (48%) and independent growers (52%). Revenues flow in from all over the world, but North America accounted for ~53% of its total sales in the first nine months of 2012. 

Revenue Composition

Banana sales contributed ~45% of its top line revenues in the first nine months of F2012. Other fresh products consisting of golden pineapples, melons, tomatoes, and fresh cut produce, etc., contributed ~45% to sales and the remaining 10% flows in from its prepared food division, which consists of canned products, beverages, poultry, etc.

Industry Dynamics

The fresh produce and prepared foods business is a very competitive one, and competition is magnified because most products are perishable. Del Monte broadly competes with a few MNCs and smaller firms regionally in multiple product segments. According to the UN, four multinationals including Del Monte cumulatively control more than 80% of the world’s banana market. Major direct competitors include Dole Food Company (NYSE: DOLE) and Chiquita Brands International (NYSE: CQB) and Ireland based, Fyffes Plc. Del Monte also competes with Sysco Corp. (NYSE: SYY) and Core-Mark (NASDAQ: CORE) on some product categories but on a much smaller scale.

Highly Leveraged and Troubled Competitors Are Shrinking

Both Chiquita and Dole are heavily indebted and undergoing restructuring. Dole has decided to offload its packaging food and Asian fresh produce businesses for $1.69 billion for deleveraging its balance sheet by paying off its debt, and for its restructuring efforts.

Chiquita Brands, on the other hand, had a major management team reshuffle, with a new CEO in place. It also cut substantial amounts of head count, cutting non-core product investments, and its earnings are currently in the red.

2013 Key Drivers

(1) Investments in new product development and expanding offerings to snack categories

(2) Sustain premium pricing position

(3) Maintain market leadership in existing product categories

(4)  Capturing market share from direct competitors

(5) Diversifying revenue base by making heavy investments in the Middle East and Western Africa

(6) Possible share buybacks.

<table> <tbody> <tr> <td colspan="2"> <p><strong>Select Financial Data- Comparable Companies</strong></p> </td> <td> </td> <td> </td> </tr> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Del Monte</strong></p> </td> <td> <p><strong>Dole  Foods</strong></p> </td> <td> <p><strong>Chiquita Brands</strong></p> </td> </tr> <tr> <td> <p>TTM Net Sales (US$ m)</p> </td> <td> <p>3,425</p> </td> <td> <p>6,840</p> </td> <td> <p>3,060</p> </td> </tr> <tr> <td> <p><em>Operating (EBIT) Margin</em></p> </td> <td> <p>4.32%</p> </td> <td> <p>2.63%</p> </td> <td> <p>0.47%</p> </td> </tr> <tr> <td> <p><em>Net Profit Margin</em></p> </td> <td> <p>3.89%</p> </td> <td> <p>1.01%</p> </td> <td> <p>-2.90%</p> </td> </tr> <tr> <td> <p><strong>TTM P/E  (x)</strong></p> </td> <td> <p><strong>11.30</strong></p> </td> <td> <p><strong>14.51</strong></p> </td> <td> <p><strong>N/A</strong></p> </td> </tr> <tr> <td> <p><strong>Price/Book (x)</strong></p> </td> <td> <p><strong>0.82</strong></p> </td> <td> <p><strong>1.11</strong></p> </td> <td> <p><strong>0.46</strong></p> </td> </tr> <tr> <td> <p>Total Debt  (US$ m)</p> </td> <td> <p>28.40</p> </td> <td> <p>1,690.0</p> </td> <td> <p>587.12</p> </td> </tr> <tr> <td> <p>Total  Cash (US$ m)</p> </td> <td> <p>24.6</p> </td> <td> <p>82.04</p> </td> <td> <p>36.87</p> </td> </tr> <tr> <td> <p><strong>EV/EBITDA</strong></p> </td> <td> <p><strong>6.84</strong></p> </td> <td> <p><strong>9.16</strong></p> </td> <td> <p><strong>11.47</strong></p> </td> </tr> <tr> <td> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong> </strong></p> </td> </tr> <tr> <td colspan="4"> <p><em>Source: Company Filings (MRQ) , Estimates,Yahoo, Food and Agriculture Organization of the UN (FAO)</em></p> </td> </tr> </tbody> </table>

Price Multiple Expansion

Based on comparable company analysis, Del Monte's relativel ylow P/E multiple and price to book ratio should expand substantially. Both of these metrics are well in line with its peer group. In addition, the firm doesn't have any long-term debt and has higher profit margins relative to its comparable firms. Its risk/return profile is much more attractive compared to Chiquita Brands as well as Dole Foods, as both of them have a lot of credit risk. Blending in all these factors, it is pretty evident that Del Monte should trade at a decent premium to its Net Assets.

The Case for Del Monte

FDP’s intention to diversify its product portfolio along with its global footprint, strong brand name, established distribution channels and company-owned logistics provide the company a lot of momentum in introducing new products and capturing market share from struggling competitors. FDP should be able to capitalize in the banana and pineapple segments, which combined make up 61% of its total revenues. It is very nicely positioned to gain market share from its direct competitors, while at the same time trading well below Net Assets. If that is not enough, it also boasts an annualized dividend yield of 1.59%.

ishfaque has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Sysco . 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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