Is Dole Foods a Value Trap?

By Palwasha Saaim - September 10, 2012 | Tickers: CQB, CORE, DOLE, FDP, SYY | 0 Comments

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He buys it. He buys more of it. And he can't get enough of it. David Murdock, 89 year old CEO and Chairman of Dole Foods (NYSE: DOLE) has recently been seen on a buying spree. Over the last two months, he's amassed millions worth of Dole shares. His latest stock purchase, for which he paid a price of $12.5 apiece (which also happens to be the IPO price of the stock from 3 years ago), takes his present stake in the company to over 63%. Dole has been making news because of this surge in insider buying activity and word on the street is that the stock will climb. Well, of course it will. Simple demand-supply mechanism. But the right question to ask at this juncture is whether the stock can reach new highs and maintain that potential in the long run? My answer in one word would be--NO! If you are smirking right now, give me a chance to reason with you.

Historical Underperformance

For one, Dole stock has historically consistently underperformed both Dow Jones and S&P 500 indices. The stock closed at $12.9 on the day that I'm writing this. This is an about 3.2% premium to its IPO price of $12.5 and a 5% discount to its 52 week high of $13.56. Historically, ever since its fall '09 IPO, every time that the stock started picking up some pace, it went crashing down back to its IPO price (or lower). During this period, it paid no dividends. Say, you bought it off the IPO, then your total return excluding inflation would be a meager 3.2% premium. To breakeven with inflation, the $12.5 stock in 2009 should have at least been $13.35 today. So, factor in inflation and your return is actually negative. 

True Value Trap

In order to qualify as a value trap, Dole needs to consistently give low price multiples that indicate undervaluation but at the same time be unable show considerable value appreciation (because of restrained buying activity). For comparison purposes, I've picked two of Dole's closest competitors--Chiquita Brands (NYSE: CQB) and Fresh Del Monte Products (NYSE: FDP), and two other industry players that are less of a direct competition to Dole than the former two--these are Sysco Corp (NYSE: SYY) and Core-Mark Holdings (NASDAQ: CORE). If any two of the three price multiples in the table below are lower than a peer's, I've determined Dole to be undervalued relative to that peer.

Price Multiples Comparison

See, how Chiquita is the only undervalued stock relative to Dole. Compared to the rest, Dole appears undervalued. But here lies the glitch. The multiples look attractive but they don't show the complete picture. The complete picture looks something like the table below, and it's nasty.

Comparison of Financials

Dole has the lowest returns on equity and assets, second only to Chiquita. Dole's profit margin is five times lower than its close competitor, Fresh Del Monte. But the worst of all--its debt to equity is insanely high when compared with other industry players. So why exactly is Mr. Murdock suddenly so enthusiastic about his company? Beats me.

The business structure (set aside the financials) of Dole Foods, in it of itself, may be good. Dole products may be loved by many. The company is diversifying by expanding its line of processed foods of nutritional value (like salads, juices, etc.), in addition to dealing in conventional agriculture, which is welcomed. Insider ownership as high as 63% of the company, and continuing, is a plus; but speaking strictly in financials terms and historical stock performance, the stock is a definite value trap.  

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