Inflation Hedge Par Excellence
Paul is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fresh Del Monte Produce (NYSE: FDP) is a terrific, conservative, food and farmland investment today. With little sponsorship on Wall Street, it is flying below the radar of many investors looking for a safe, food-based play on higher commodity prices and continuing levels of money printing globally by fiat currency governments.
Fresh Del Monte Produce Inc. grows, transports and markets fruits, vegetables, juices, beverages, snacks, poultry, and meat products worldwide. The company’s businesses also include ocean freight and the manufacture of plastic and paper boxes. Its brand names include Del Monte, UTC, Rosy, Fruit Express, Just Juice, and Fruitini.
The company has far fewer liabilities than its direct peers, including Dole Food (NYSE: DOLE) or Chiquita Brands (NYSE: CQB). While FDP’s competitors have mountains of debt, Del Monte has more cash and short-term liquid assets than t liabilities on their balance sheet. You can review the 2011 Fresh Del Monte Produce 10-K filing with the SEC here.
Del Monte has a solid tangible book value reading, far greater than either Dole or Chiquita also. Basically trading near its tangible book value of $1.3 billion, with a market capitalization of $1.4 billion, investors buying FDP around $24 a share are purchasing warehouses, trucks and 60,000 acres of prime banana, melon and pineapple farmland in South and Central America at their depreciated accounting “cost.” Counting the real world inflation of farmland, building and equipment values the past decade or two, Quantemonics figures the underlying hard asset, net “break-up” value of FDP is considerably higher than the current stock quote.
In comparison, Dole and Chiquita, plus most other Food industry giants like Kellogg (NYSE: K), General Mills (NYSE: GIS), H.J. Heinz, Kraft Foods or Campbell Soups have little or no net hard asset value to backstop stock prices. For example, Dole has a negative tangible book value of $500 million, with $2.5 billion in long-term liabilities. Chiquita has little tangible book value, with long-term liabilities of $700 million. Kellogg has a negative tangible book value of better than $3 billion, with $7 billion in long-term liabilities. General Mills has a negative tangible book value of $6 billion, with $10 billion in long-term liabilities.
Food companies are able to leverage themselves to the hilt because of strong holds on their product categories, largely the result of years of goodwill built around brand names. In addition, high levels of debt and little hard asset book value help to prevent unwanted takeovers. Under this logic, Del Monte’s low level of liabilities and high tangible, break-up value make it an attractive buyout target at the right price.
For value investors, Fresh Del Monte is earning about 10% annually on your capital around $24 a share. FDP can use its daily profits to pay dividends to owners, buy more land or other food businesses, and/or purchase its own shares at this low valuation to help future stock worth. The Food industry P/E average is closer to 15 currently versus the 10 number on FDP. You can review some earnings and revenue estimates here.
The kicker is inflation. Considering Fresh Del Monte’s current positive financial backdrop, decent profit margins, and largely “owned” asset base (as opposed to leased or leveraged), a pick-up in general food pricing will go DIRECTLY to the bottom line profitability of the business. Given a 10% rise in food pricing in 2013, we are estimating a 20%-30% jump in EPS, assuming all other variables remain the same. Given a double in food prices the next 3-5 years, from high rates of general inflation (or reckless hyperinflation money printing), FDP’s earnings could rise 200%-300% quite easily. The company’s break-up value would spike with the jump in overall prices to boot.
We rate Dole and Chiquita as Market Perform selections currently in our models, with the processing and retailing leaders of Kellogg, General Mills, Heinz, Kraft and Campbell Soups as Market Outperforms. Stable demand for food items, above average profit margins, and the ability to pass on raw commodity price increases to customers are reasons to own many in the sector. Their defensive stock trading histories and inflation hedging characteristics are an ideal fit for the coming economy we are forecasting.
When reviewing all the data points, Del Monte stands out as the strongest BUY candidate in the Food sector. Honestly, few other basic industry, conservatively run businesses have such a low, risk-adjusted foundation going into a period of high inflation. We like Fresh Del Monte Produce as an inflation hedge and a core holding in value portfolios near the current stock quote.
Courtesy of StockCharts.com
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