A Cheap Commodity Stock with Upside Potential
Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A great long term investment requires a look at a company's business prospects from various angles. In my previous post on Fresh Del Monte (NYSE: FDP), I highlighted why Fresh Del Monte will benefit from struggling competitors, primarily based on its much stronger relative position in the fresh produce space. It operates in a generic agricultural commodity marketplace, however, Fresh Del Monte has separated itself from the pack with a strong brand name built over many years, and has managed its business lines very well. A SWOT Analysis would be very insightful and provide a deeper glimpse of its possibilities in the near and distant future.
Strong Brand Name: Del Monte has managed to become a household name over the years and boasts of a pretty strong brand name, even though it is a company whose products are primarily commodities with wild price fluctuations occurring sometimes.
Consumer Demand for its products are stable, as they consist of mostly basic necessities, and not tied to the overall economic cycle. Thus, it is classified as a consumer staples company.
Category Leader: Del Monte has market leading positions in a number of product categories such as its number one position in marketing Golden Pineapples, and number three standing for Bananas. It is part of a strong oligopoly with Chiquita Brands and Dole Foods in a number of product lines, most notably, bananas. These three companies along with Irish company, Fyffes hold more than 80% market share in the bananas category worldwide.
Improving Position: From F'2010 to the last twelve months, all Profitability margins have ticked up for Del Monte, showing a step in the right direction. In addition, Del Monte has retired Long-term debt, and is poised to further increase Operating and Net Margins in the coming years without worrying about debt repayment. This is a strong point of the company's healthy situation, relative to its struggling competitors.
Company Logistics: Del Monte bought a number of ships to control freight and transportation costs, as the freight rates are going up. The investment in further building out a company owned fleet will help Fresh Del Monte hedge against very volatile shipping freight costs as well as control the timing of product delivery.
Lack of pricing power: A lack of product differentiation due to the commodity nature of its products, reduces the ability to increase prices. As a result, the company and its competitors all have low pricing power, and this is very evident in the low operating margins year after year.
Dependence on Bananas: Revenues from bananas alone made up 35.7% of total revenues in 2004, and in the trailing twelve months this has gone up to ~46%. This poses a material risk to Fresh Del Monte's revenue stream. However, the good part is the company is now a dominant force in banana production and distribution.
High fixed costs: Fresh Del Monte has to pay a lot of upfront costs to farmers and bear other fixed costs, even if the firm can't sell its produce. As a result, the firm operates with a lot of fixed costs, and a lot of operating leverage.
Expand international footprint even more, by investing in the Middle East and West Africa, which are relatively lesser penetrated regions for the company, and also diversifies its revenue geography.
Arch-Rivals are Shrinking: Del Monte's main competitors in the agricultural products market specifically fresh produce, Chiquita Brands (NYSE: CQB) and Dole Foods (NYSE: DOLE) are going through restructuring due to losses and high debt loads. Chiquita Brands cut divisions and has new strategic focus along with a management team shuffle with a new CEO and COO. Dole Foods agreed to sell of its Asian Produce business and Worldwide Packaged food business to Itochu for $1.69bn, as a result, Dole's fresh fruit business will shrink by 30%. In addition, Dole Foods has a new CEO and top management as well. This is a big opportunity for Del Monte to capture market share in certain key segments such as bananas and pineapples.
Expanding Product Portfolio to introduce a wider array of fresh cut products, offer more items in the snacks category as well as introduce poultry products in North America.
Constant threat: Any agricultural producers are broadly exposed to natural disasters, and other catastrophes, which can hurt top line revenues and the bottom line as well.
Regulatory Risk/ Lawsuits: Being a global food producer and a dominant one, it is under constant scrutiny of regulators such as the FDA and other regulatory bodies around the world.
Heavy Competition from fresh produce suppliers like Dole and Chiquita and food distributors like Sysco (NYSE: SYY) and Core-Mark (NASDAQ: CORE) for a number of grocery categories, fresh produce, and other products. All these companies are very dominant and have very strong distribution networks which they can leverage to acquire market share from Fresh Del Monte. In addition, heavy competition and price shifts of the commodity products in a negative manner can materially harm the company.
Fresh Del Monte has been the only company amongst its peer group to grow and maintain market leadership position during harsh economic times, in particular in Europe. Its main rivals, Chiquita Brands and Dole Foods have suffered major setbacks, and reduced divisions in order to cut debt and get back into the path of profitability. Fresh Del Monte has retired Long-term debt in early 2012, and is investing heavily across the globe to have a wider revenue base, and getting a stronger hold on its existing distribution channel. Management might repurchase shares, which will give the stock another catalyst to go north. Fresh Del Monte is trading at a decent discount to Net Assets with a Price/Book Ratio of 0.83 and over time the company's stock should trade at a strong premium to its book value.
ishfaque has no position in any stocks mentioned. The Motley Fool recommends Syscooration . 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!