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Why Fruits and Vegetables Should Not Be Part of a Balanced Portfolio

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

Shares of Dole Food Company (NYSE: DOLE), the world’s largest producer and seller of fruit and vegetables, surged 22% on June 11, after CEO David Murdock made an offer to take the company private for $12 per share. What does this sudden move mean for the rest of the fruit and vegetables industry, which includes Fresh Del Monte Produce (NYSE: FDP) and Chiquita Brands (NYSE: CQB)?

Is being taken private necessarily a bad thing?

As tech investors have seen with Michael Dell’s efforts to take personal computer giant Dell private again, being taken private after several years on the public market is not a positive sign. It usually indicates that a company needs to restructure its operations for longer-term growth away from the myopic gaze of investors more concerned with quarterly reports.

For Dole, that may be the case as well. Dole’s investors recently expressed dismay over the company’s indefinite suspension of its share buyback plan to buy three custom built refrigerated container ships for $165 million. Analysts are also becoming increasingly bearish on the company’s growth prospects, with Thomson Reuters’ StarMine valuing the intrinsic value (based on ten-year growth models) of the company at $9.46 per share - 21% lower than Murdock’s offer. To top top that off, Dole has reported losses for three consecutive quarters.

Prior to Murdock’s offer, shares of Dole had plunged 33% from its all-time high of $15.16 in September. That surge in September was attributed to the sale of Dole’s packaged foods and Asia fresh produce business to Japanese conglomerate Itochu for $1.7 billion. That sale reduced Dole’s size by a third, leaving the company with only its fruit and vegetables operations in North America, and its fruit business in Latin America, Europe and Africa. 

Lastly, Dole and Fresh Del Monte were both fined in 2008 by the EU for price collusion of banana exports. Fresh Del Monte recently won a reduction of its fine to 8.82 million euros ($11.4 million), while Dole lost an appeal to reduce its 45.6 million euro ($60.7 million) fine. That big fine is currently weighing down Dole’s quarterly earnings.

Faced with these daunting headwinds, it seems like an ideal time for 90-year old Murdock, who took over Dole Food Company from the nearly bankrupt Hawaiian firm Castle & Cooke in 1985, to take the company private. This wouldn't be the first time Murdock has taken the company private - he initially acquired Dole privately in 2003 and took it public in 2009.

Murdock, who already owns 40% of Dole’s outstanding shares, will have to pay $645 million for the rest of the company - no big deal for a man with a net worth of $2.4 billion who plans to live until the age of 125. 

Let’s go bananas!

In my opinion, Murdock is smart to take Dole private before the industry hits more challenging headwinds over the next few years.

Last quarter, Fresh Del Monte reported a 34% year-on-year plunge in diluted earnings as revenue rose 2.3%. Its margins contracted across the board, with net margin dropping the most, from 6.7% to 4.5%. Higher sales of fresh produce in North America and the Middle East were offset by lower banana prices in Europe and softer demand for its fruit and vegetables across the region.

Sales of bananas rose 2% from the prior year quarter, and currently comprise 44% of Fresh Del Monte’s top line. However, gross profit from bananas declined 21%, due to price volatility and a 2% increase in unit costs. Fresh Del Monte offset some of these losses with an 8% increase in melon sales and 7% gain in fresh-cut fruit sales.

Chiquita, which generates 65% of its revenue from bananas, was also hit by this volatility. Last quarter, Chiquita’s earnings and revenue declined 25% and 2.5%, respectively. The company cited the same headwinds as Fresh Del Monte, noting that reduced sales volumes in Europe hurt its top and bottom-line growth. Sales of bananas declined 3% year-on-year, while the segment’s profit declined 7.4%.

Dole, by comparison, is not as exposed to banana prices as either of these two competitors. Dole groups bananas together with its diversified fresh fruit segment, which reported a 4% increase in sales to $764 million last quarter, accounting for 72.5% of its top line. Adjusted EBITDA from the segment rose 26%, a stark contrast to Fresh Del Monte and Chiquita's losses. Moreover, Dole actually reported improved pricing and higher sales volumes in Europe, which were offset by lower sales of Chilean deciduous fruits and lower banana prices in North America. Looking forward, the company expects lower earnings of bananas and berries to weigh down on its bottom-line growth for the rest of the year.

In other words, it appears that Dole’s more diversified basket of fruit and vegetables has insulated it from some of the challenges facing its competitors.

Diversification is a double-edged sword

However, just as investors realize that diversified mutual funds sometimes woefully underperform individual stocks, Dole’s long-term growth has been utterly dismal compared to Fresh Del Monte and Chiquita.

<table> <tbody> <tr> <td> </td> <td> <p><span><span><span><strong>Forward P/E</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Price to Sales</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Return on Equity</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Debt to Equity</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Profit Margin</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Qty. Earnings Growth (y-o-y)</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Qty. Revenue Growth (y-o-y)</strong></span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span><strong>Dole Food</strong></span></span></span></p> </td> <td> <p><span><span><span>19.17</span></span></span></p> </td> <td> <p><span><span><span>0.21</span></span></span></p> </td> <td> <p><span><span><span>-2.66%</span></span></span></p> </td> <td> <p><span><span><span>254.47</span></span></span></p> </td> <td> <p><span><span><span>-5.40%</span></span></span></p> </td> <td> <p><span><span><span>N/A</span></span></span></p> </td> <td> <p><span><span><span>-3.00%</span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span><strong>Fresh Del Monte</strong></span></span></span></p> </td> <td> <p><span><span><span>11.98</span></span></span></p> </td> <td> <p><span><span><span>0.45</span></span></span></p> </td> <td> <p><span><span><span>6.79%</span></span></span></p> </td> <td> <p><span><span><span>8.09</span></span></span></p> </td> <td> <p><span><span><span>3.54%</span></span></span></p> </td> <td> <p><span><span><span>-34.20%</span></span></span></p> </td> <td> <p><span><span><span>2.30%</span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span><strong>Chiquita Brands</strong></span></span></span></p> </td> <td> <p><span><span><span>10.30</span></span></span></p> </td> <td> <p><span><span><span>0.16</span></span></span></p> </td> <td> <p><span><span><span>-65.55%</span></span></span></p> </td> <td> <p><span><span><span>158.04</span></span></span></p> </td> <td> <p><span><span><span>-12.80%</span></span></span></p> </td> <td> <p><span><span><span>N/A</span></span></span></p> </td> <td> <p><span><span><span>-2.40%</span></span></span></p> </td> </tr> <tr> <td> <p><span><span><span>Advantage</span></span></span></p> </td> <td> <p><span><span><span><strong>Chiquita Brands</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Chiquita Brands</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Fresh Del Monte</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Fresh Del Monte</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Fresh Del Monte</strong></span></span></span></p> </td> <td> <p><span><span><span><strong>Fresh Del Monte</strong></span></span></span></p> </td> <td> <p><span><span><span><strong><span>Fresh Del Monte</span></strong></span></span></span></p> </td> </tr> </tbody> </table>

Source: Yahoo Finance, 6/12/2013

Not only is Dole trading at a premium valuation, compared to the trailing industry P/E average of 5.15, but it is also shouldering the highest debt, a negative profit margin and the worst top-line growth. By comparison, Chiquita appears to be the cheapest stock, but its awful return on equity, negative profit margin and negative sales growth all indicate that it is not a bargain.

Meanwhile, Fresh Del Monte appears to be the most stable choice for investors interested in fruits and vegetables. Investors have also taken notice of this disparity between these three companies, as seen in their stock price performance over the past five years.

<img alt="" src="http://media.ycharts.com/charts/32f70f2b3d1009bc92225360ba594432.png" />

The fruity bottom line

There’s not much point to buying Dole at the moment, unless you anticipate a higher buyout offer from David Murdock. Otherwise, the company’s fundamentals are too shaky at the moment, and there’s not potential upside for the stock. Fresh Del Monte looks like it can recover faster than Dole and Chiquita, but it looks like a slow growth story for now. The bottom line is simple - although fruits and veggies should be part of any person’s well-balanced diet, they don’t necessarily belong in a balanced portfolio.  

Leo Sun 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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