Avocado company Mission Produce (NASDAQ:AVO) missed analysts' expectations in Q4 FY2023, with revenue up 8.4% year on year to $257.9 million. It made a non-GAAP profit of $0.11 per share, down from its profit of $0.13 per share in the same quarter last year.
Key Takeaways from Mission Produce's Q4 Results
Volumes missed expectations based "on continued weather-related challenges in Peru" , leading to a revenue shortfall vs. Consensus expectations. However, gross margin was in line and operating expenses were lower than expected, leading to a slight EPS beat. Overall, this was a mixed quarter for Mission Produce. Looking ahead, management mentioned that pricing should be a tailwind to revenue. The stock is flat after reporting and currently trades at $9.57 per share.
Mission Produce (AVO) Q4 FY2023 Highlights:
- Market Capitalization: $654.1 million
- Revenue: $257.9 million vs analyst estimates of $288.5 million (10.6% miss)
- EPS (non-GAAP): $0.11 vs analyst estimates of $0.10 ($0.01 beat)
- Free Cash Flow of $33.7 million, up from $6.7 million in the previous quarter
- Gross Margin (GAAP): 10.8%, down from 11.3% in the same quarter last year (in line)
- Sales Volumes were down 4% year on year (miss)
Founded in 1983 in California, Mission Produce (NASDAQ:AVO) grows, packages, and distributes avocados.
The company began as a small and modest avocado distributor. Over time, however, Mission Produce grew organically and also capitalized on strategic acquisitions of avocado farms and processing plants that allowed the company to cement itself as a vertically-integrated and dominant player in the industry.
The product is self explanatory, but Mission Produce differentiates itself with the scale and technology that allows their product to reach consumers in near-peak or peak condition. Because let’s be honest, no one likes that rock-hard green avocado that takes a long time to ripen, and on the other side of the coin, no one likes an over-ripened or rotten avocado either.
The core customer tends to be a health conscious shopper, although avocados are making their way more into the mainstream through Mexican dishes, salads, and avocado toast. Mission Produce’s offering can be found in many locations selling fresh fruit and vegetables including supermarkets, club stores, and large-format general merchandise retailers that have grocery sections.
As America industrialized and moved away from an agricultural economy, people faced more demands on their time. Packaged foods emerged as a solution offering convenience to the evolving American family, whether it be canned goods, prepared meals, or snacks. Today, Americans seek brands that are high in quality, reliable, and reasonably priced. Furthermore, there's a growing emphasis on health-conscious and sustainable food options. Packaged food stocks are considered resilient investments. People always need to eat, so these companies can enjoy consistent demand as long as they stay on top of changing consumer preferences. The industry spans from multinational corporations to smaller specialized firms and is subject to food safety and labeling regulations.Competitors in the avocado industry include Calavo Growers (NASDAQ:CVGW), private company West Pak Avocado, and some smaller, independent growers and distributors.
Mission Produce is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefitting from better brand awareness and economies of scale.
As you can see below, the company's annualized revenue growth rate of 3.4% over the last three years was mediocre for a consumer staples business.
This quarter, Mission Produce's revenue grew 8.4% year on year to $257.9 million, missing Wall Street's estimates. Looking ahead, Wall Street expects revenue to decline 5.6% over the next 12 months, a deceleration from this quarter.
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
Mission Produce's average quarterly volume growth was a healthy 1.3% over the last two years. This is pleasing because it shows consumers are purchasing more of its products.
In Mission Produce's Q4 2023, sales volumes dropped 4% year on year. This result was a reversal from the 6% year-on-year increase it posted 12 months ago. A one quarter hiccup shouldn't deter you from investing in a business. We'll be monitoring the company to see how things progress.
Gross Margin & Pricing Power
All else equal, we prefer higher gross margins. They make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.
Mission Produce's gross profit margin came in at 10.8% this quarter. in line with the same quarter last year. That means for every $1 in revenue, a chunky $0.89 went towards paying for raw materials, production of goods, and distribution expenses.
Mission Produce has poor unit economics for a consumer staples company, leaving it with little room for error if things go awry. As you can see above, it's averaged a paltry 8.3% gross margin over the last two years. Its margin, however, has been trending up over the last 12 months, averaging 465% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment.
Operating margin is a key profitability metric for companies because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.
This quarter, Mission Produce generated an operating profit margin of 2.8%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.Zooming out, Mission Produce was roughly breakeven when averaging the last two years of quarterly operating profits, weak for a consumer staples business. Its margin has also seen few fluctuations, meaning it will take a big change to improve profitability.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Mission Produce's free cash flow came in at $33.7 million in Q4, up 77.4% year on year. This result represents a 13.1% margin.
While Mission Produce posted positive free cash flow this quarter, the broader story hasn't been so clean. Over the last two years, Mission Produce's demanding reinvestments to stay relevant with consumers have drained company resources. Its free cash flow margin has been among the worst in the consumer staples sector, averaging negative 3.5%. Investors are likely hoping for consistent free cash flow generation in the future.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Mission Produce's decent track record of profitable investments over the last five years gives it the flexibility to engage with financiers if it wants to raise or borrow capital. Its five-year average ROIC was 10.2%, slightly better than the broader consumer staples sector.
Balance Sheet Health
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, the risk we care most about is the permanent loss of capital (not short-term stock price volatility), which can happen when a company goes bankrupt or raises capital from a disadvantaged position.
Mission Produce is a profitable company that has enough money coming in to support its borrowing obligations. The company’s net debt-to-EBITDA ratio, which shows how much debt it has for every dollar of EBITDA (aka profits), currently sits at 2.8x. This number is reasonable, so investors can sleep easy knowing the company won't file Chapter 11 anytime soon.
Is Now The Time?
Mission Produce may have had a mixed quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of Mission Produce, we'll be cheering from the sidelines. Its revenue growth has been uninspiring over the last three years, and analysts expect growth to deteriorate from here. And while its projected EPS growth for the next year implies the company's fundamentals will improve, the downside is its gross margins make it more challenging to reach positive operating profits compared to other consumer staples businesses. On top of that, its subpar brand reputation keeps it from exerting much influence over consumers.
Mission Produce's price-to-earnings ratio based on the next 12 months is 15.5x. While the price is reasonable and there are some things to like about Mission Produce, we think there are better opportunities elsewhere in the market right now.
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