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Calavo (CVGW) Research Report: Q1 CY2024 Update


Full Report / June 10, 2024

Fresh produce company Calavo Growers (NASDAQGS:CVGW) reported Q1 CY2024 results beating Wall Street analysts' expectations, with revenue down 24.6% year on year to $184.4 million. It made a non-GAAP profit of $0.50 per share, improving from its loss of $0.01 per share in the same quarter last year.

Calavo (CVGW) Q1 CY2024 Highlights:

  • Revenue: $184.4 million vs analyst estimates of $165.8 million (11.2% beat)
  • EPS (non-GAAP): $0.50 vs analyst estimates of $0.38 (32.5% beat)
  • Gross Margin (GAAP): 11%, up from 6.1% in the same quarter last year
  • Market Capitalization: $452.3 million

A trailblazer in the avocado industry, Calavo Growers (NASDAQGS:CVGW) is a pioneering California-based provider of high-quality avocados and other fresh food products.

The company's story began in 1924 when a group of farmers in the fertile region of Santa Paula, California formed a cooperative to market and distribute avocados. Their goal was to raise awareness and create a thriving market for this then-unfamiliar fruit among Americans.

Through innovative marketing campaigns and efforts to educate the public on the culinary uses and health benefits of avocados, Calavo Growers played a pivotal role in its integration into American cuisine. Today, avocados have become a staple ingredient in countless dishes and are celebrated for their nutritional benefits.

While avocados lie at the heart of Calavo Growers's business, its product portfolio extends far beyond. The company offers a diverse array of fresh foods, including tomatoes, papayas, pineapples, and pre-packaged guacamole. This diversification allows it to serve the evolving needs and tastes of consumers, making it a versatile player in the fresh produce industry.

Calavo Growers operates across North America, Mexico, and other international markets, and its extensive distribution network ensures products are readily available in grocery stores, restaurants, and food service establishments.

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 fresh produce category include Dole (NYSE:DOLE), Fresh Del Monte (NYSE:FDP), and Mission Produce (NASDAQGS:AVO) along with private companies Chiquita Brands International and Sunkist Growers.

Sales Growth

Calavo 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 revenue has declined over the last three years, dropping 6.7% annually. This is among the worst in the consumer staples industry, where demand is typically stable.

Calavo Total Revenue

This quarter, Calavo's revenue fell 24.6% year on year to $184.4 million but beat Wall Street's estimates by 11.2%. Looking ahead, Wall Street expects revenue to decline 21.4% over the next 12 months.

Gross Margin & Pricing Power

All else equal, we prefer higher gross margins. They usually indicate that a company sells more differentiated products and commands stronger pricing power.

Calavo's gross profit margin came in at 11% this quarter, up 4.9 percentage points year on year. That means for every $1 in revenue, a chunky $0.89 went towards paying for raw materials, production of goods, and distribution expenses.

Calavo Gross Margin (GAAP)

Calavo 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 7.9% gross margin over the last two years. Its margin, however, has been trending up over the last 12 months, averaging 33.3% 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.

This quarter, Calavo generated an operating profit margin of 3.9%, up 4.5 percentage points year on year. This increase was encouraging, and we can infer Calavo had stronger pricing power and lower raw materials/transportation costs because its gross margin expanded more than its operating margin.

Calavo Operating Margin (GAAP)

Zooming out, Calavo was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a consumer staples business, producing an average operating margin of 1.3%. However, Calavo's margin has improved by 1.2 percentage points on average over the last year, showing the company is heading in the right direction.

EPS

We track the growth in earnings per share (EPS) for the same reason as revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.

Sadly for Calavo, its EPS declined more than its revenue over the last three years, dropping by 30.1% annually. However, this alone doesn't tell us much about its day-to-day operations because its operating margin actually expanded.

Calavo EPS (Adjusted)

We can take an even deeper look into Calavo's earnings performance. A three-year view shows Calavo has diluted its shareholders, growing its share count by 1.1%. This has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.

In Q1, Calavo reported EPS at $0.50, up from negative $0.01 in the same quarter last year. This print beat analysts' estimates by 32.5%. Over the next 12 months, Wall Street expects Calavo to grow its earnings. Analysts are projecting its EPS of $0.57 in the last year to climb by 147% to $1.41.

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? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money it has raised (debt and equity).

Calavo's five-year average ROIC was 4.3%, 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.

Calavo Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Unfortunately, Calavo's ROIC averaged 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

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

Calavo reported $4.27 million of cash and $45.85 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 $13.52 million of EBITDA over the last 12 months, we view Calavo's 3.1x net-debt-to-EBITDA ratio as safe. We also see its $2.99 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 Calavo's Q1 Results

We were impressed by how significantly Calavo blew past analysts' revenue and EPS expectations this quarter. The company's strong outperformance was driven by improved prices in its core avocado business and favorable input costs in its guacamole business. 

Looking ahead, Calavo didn't provide guidance but notes it's aiming to close the sale of its Fresh Cut division in the fiscal third quarter (calendar year Q2).

Overall, this quarter's results still seemed fairly positive and shareholders should feel optimistic. The stock is up 11.9% after reporting and currently trades at $28 per share.

Is Now The Time?

Calavo may have had a favorable 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 Calavo, we'll be cheering from the sidelines. Its revenue has declined over the last three years, and analysts expect growth to deteriorate from here. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its declining EPS over the last three years makes it a less attractive asset to the public markets. On top of that, its gross margins make it more challenging to reach positive operating profits compared to other consumer staples businesses.

Calavo's price-to-earnings ratio based on the next 12 months is 17.8x. While we've no doubt one can find things to like about Calavo, 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 $33 per share right before these results (compared to the current share price of $28).

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