452583

Mission Produce (AVO) Research Report: Q1 CY2024 Update


Full Report / June 06, 2024

Avocado company Mission Produce (NASDAQ:AVO) reported results ahead of analysts' expectations in Q1 CY2024, with revenue up 34.6% year on year to $297.6 million. It made a non-GAAP profit of $0.14 per share, improving from its loss of $0.07 per share in the same quarter last year.

Mission Produce (AVO) Q1 CY2024 Highlights:

  • Revenue: $297.6 million vs analyst estimates of $226.5 million (31.4% beat)
  • EPS (non-GAAP): $0.14 vs analyst estimates of -$0.01 ($0.15 beat)
  • Gross Margin (GAAP): 10.4%, up from 8.2% in the same quarter last year
  • Free Cash Flow was -$4.8 million compared to -$400,000 in the previous quarter
  • Sales Volumes rose 8% year on year
  • (19% in the same quarter last year)
  • Market Capitalization: $818.3 million

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.

Perishable Food

The perishable food industry is diverse, encompassing large-scale producers and distributors to specialty and artisanal brands. These companies sell produce, dairy products, meats, and baked goods and have become integral to serving modern American consumers who prioritize freshness, quality, and nutritional value. Investing in perishable food stocks presents both opportunities and challenges. While the perishable nature of products can introduce risks related to supply chain management and shelf life, it also creates a constant demand driven by the necessity for fresh food. Companies that can efficiently manage inventory, distribution, and quality control are well-positioned to thrive in this competitive market. Navigating the perishable food industry requires adherence to strict food safety standards, regulations, and labeling requirements.

Competitors in the avocado industry include Calavo Growers (NASDAQ:CVGW), private company West Pak Avocado, and some smaller, independent growers and distributors.

Sales Growth

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 8.1% over the last three years was decent for a consumer staples business.

Mission Produce Total Revenue

This quarter, Mission Produce reported wonderful year-on-year revenue growth of 34.6%, and its $297.6 million in revenue exceeded Wall Street's estimates by 31.4%. Looking ahead, Wall Street expects revenue to decline 5.6% over the next 12 months, a deceleration from this quarter.

Volume Growth

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 robust 6.9% over the last two years. This is good because meaningful volume growth is hard to come by in the stable consumer staples sector.

Mission Produce Year-On-Year Volume Growth

In Mission Produce's Q1 2024, sales volumes jumped 8% year on year. By the company's standards, this result was a meaningful deceleration from the 19% year-on-year increase it posted 12 months ago. We'll be watching Mission Produce closely to see if it can reaccelerate demand for its products.

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.

This quarter, Mission Produce's gross profit margin was 10.4%, up 2.2 percentage points year on year. That means for every $1 in revenue, a chunky $0.90 went towards paying for raw materials, production of goods, and distribution expenses.

Mission Produce Gross Margin (GAAP)

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 10.3% gross margin over the last two years. Its margin, however, has been trending up over the last 12 months, averaging 41.4% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment.

Operating Margin

Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.

In Q1, Mission Produce generated an operating profit margin of 4.1%, up 4.7 percentage points year on year. This increase was encouraging, and we can infer Mission Produce was more efficient with its expenses because its operating margin expanded more than its gross margin.

Mission Produce Operating Margin (GAAP)

Zooming out, Mission Produce was roughly breakeven when averaging the last two years of quarterly operating profits, weak for a consumer staples business. However, its margin has improved by 6.8 percentage points on average over the last year, an encouraging sign for shareholders. The tide could be turning.

EPS

Analyzing revenue trends tells us about a company's historical growth, but earnings per share (EPS) growth points to the profitability of that growth–for example, a company could inflate sales through excessive spending on advertising and promotions.

Sadly for Mission Produce, its EPS declined by 18.3% annually over the last three years while its revenue grew by 8.1%. However, this alone doesn't tell us much about its day-to-day operations because its operating margin actually expanded.

Mission Produce EPS (Adjusted)

In Q1, Mission Produce reported EPS at $0.14, up from negative $0.07 in the same quarter last year. This print easily cleared analysts' estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Mission Produce to perform poorly. Analysts are projecting its EPS of $0.43 in the last year to hit $0.24.

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 burned through $4.8 million of cash in Q1, representing a negative 1.6% free cash flow margin. The company increased its cash burn by 88.6% year on year.

Mission Produce Free Cash Flow Margin

Over the last eight quarters, Mission Produce has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 0.7%, subpar for a consumer staples business. However, its margin has averaged year-on-year increases of 5.4 percentage points over the last 12 months. Continued momentum should improve its cash flow prospects.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money it has raised (debt and equity).

Mission Produce's five-year average ROIC was 2.9%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+. Its returns suggest it was mediocre at investing in profitable business initiatives.

Mission Produce Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Unfortunately, Mission Produce's ROIC averaged 6.8 percentage point decreases each year over the last few years. Paired with its already low returns, these declines suggest the company's profitable business opportunities are few and far between.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

Mission Produce reported $46.2 million of cash and $172.2 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $46.9 million of EBITDA over the last 12 months, we view Mission Produce's 2.7x net-debt-to-EBITDA ratio as safe. We also see its $12.4 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Mission Produce's Q1 Results

We were impressed by how significantly Mission Produce blew past analysts' EPS expectations this quarter. We were also excited its gross margin outperformed Wall Street's estimates. Zooming out, we think this was a great quarter that shareholders will appreciate. The stock is up 8.6% after reporting and currently trades at $12.40 per share.

Is Now The Time?

Mission Produce may have had a good 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. Although its revenue growth has been decent over the last three years, its declining EPS over the last three years makes it a less attractive asset to the public markets. And while its volume growth has been among the best in the consumer staples sector, the downside is its projected EPS for the next year is lacking.

Mission Produce's price-to-earnings ratio based on the next 12 months is 46.9x. While we've no doubt one can find things to like about Mission Produce, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $14.33 per share right before these results (compared to the current share price of $12.40).

To get the best start with StockStory, check out our most recent stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.