Is This Food Company a Buy Right Now?

ANUP 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 (NYSE: DOLE) have gone up as much as 15% this year, but most of that jump came in early June after the company's CEO offered to buy out the company for $12 per share. However, its recently released second- quarter results were not outstanding. The company saw a rise in its revenue, but a fall in its earnings. It has been adopting various strategic expansion plans to expand its business along with diversifying its products. With conditions improving in North America, the company expects growth in the future.

A brief review of the quarter

Dole Food, in its second quarter, saw revenue rise 10% to $1.2 billion. The company increased sales in its fresh fruits and fresh vegetables segments, witnessing revenue increases of 12% and 4%, respectively. The increases were mainly due to high sales of diversified fruits in Europe and Chile, and increased sales of packed vegetables. Foreign currency movements also helped its revenue in Europe to the tune of $ 8 million.

The company booked income of $2 million on a GAAP basis compared to $56 million last year. With EPS of $0.01 in comparison to last year’s $0.63, and a decline in the overall EBITDA by around $25 million from the last year’s $81 million, it seems as if Dole Food is facing some serious margin challenges. The gross profit margin declined to 8.4% from 11.7% earlier. The low earnings were due to declines in the profit margins of both the fresh vegetable and the fresh fruit businesses.

Looking forward

In its second quarter, the company suffered due to lower prices of bananas in North America and higher fruit costs in general. An improved performance from the pineapple business is expected to offset the effects of losses in the berry and the strawberry business this year. The company is also expecting profits from its fresh-packed and fresh-salad businesses.

Dole has been taking up strategic expansion plans by tying up with the Hyundai Mipo Dockyard for the buying of larger containers over its existing West Coast vessels. The ships are said to be high on efficiency and flexibility from the existing containers, and are expected to prove advantageous in the future. But certain non-business related issues should be kept in mind before investors take a look at the company as an investment.

Dole Food’s CEO and Chairman, David Murdock, decided to take the company private by buying out shares, due to which the company decided to form a committee of four directors. However, shareholders are opposing the deal as they believe that the $12 offer is not sufficient; and if they can successfully lobby their case, then there could be more upside.

The company divested its worldwide packaged-goods operations and the Asia fresh business in the quarter, and has invested this amount in its fresh fruits and vegetables businesses. This should enable Dole to focus on its core operations and improve the efficiency of its business.

In 2013, it expects overall income to range between $150 million and $170 million. But the company is facing strong competition from Chiquita Brands International (NYSE: CQB) and Fresh Del Monte Produce (NYSE: FDP), which continue to be its top contenders.

Stiff competition

Chiquita Brands has been revamping itself by divesting areas like the smoothie business, and instead focusing on its core business. It recently partnered with Universal Pictures and Illumination Entertainment and co-sponsored Despicable Me 2. The company sees this as its largest promotional activity to date and anticipates deriving sales from this in its second quarter. The company's turnaround effort has been bearing fruit and business has been improving.

Chiquita's restructuring plan is probably resulting in $60 million in cost savings annually, according to management, and it is no surprise that the stock is hovering near 52-week highs. The valuation is also not too high even though the stock is at the top end of its trading range, with a forward price-to-earnings (P/E) ratio of just 11x. Investors who are looking for a turnaround play can surely consider Chiquita for their portfolio.

At the same time, Fresh Del Monte is focused on extending its non-conventional delivery channel and sales of its fresh-cut products. The company is expanding its business in the Soviet Union and Turkey and is witnessing strong demand in those countries.

It reported results recently including a 7% rise in its sales to $1.0 billion and turned in EPS of $1.10, crushing estimates. It provides a dividend yield of 1.8% and the valuation is not rich even though the stock trades at its 52-week highs. A trailing P/E ratio of 13.4 and a forward P/E ratio of 12.6 mean that there is potential for earnings growth. A payout ratio of just 20% means that the company can increase its dividend.

Conclusion

Although Dole Food has been in the spotlight recently due to Murdock’s buyout offer, still the company expects to earn profits in the future with its recent expansion plans. It has been divesting its non-profitable businesses and investing money in the ones that are expected to generate earnings. These measures should help it do well in the future but it remains to be seen how the buyout offer plays out. The stock is richly valued at a forward P/E of 18, and it is advisable that investors tread with caution.

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ANUP SINGH 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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