Fresh produce company Fresh Del Monte (NYSE:FDP) fell short of analysts' expectations in Q1 CY2024, with revenue down 1.8% year on year to $1.11 billion. It made a non-GAAP profit of $0.34 per share, down from its profit of $0.55 per share in the same quarter last year.
Fresh Del Monte Produce (FDP) Q1 CY2024 Highlights:
- Revenue: $1.11 billion vs analyst estimates of $1.15 billion (3.8% miss)
- EPS (non-GAAP): $0.34 vs analyst expectations of $0.61 (43.8% miss)
- Gross Margin (GAAP): 7.3%, down from 8.6% in the same quarter last year
- Free Cash Flow of $6 million is up from -$19.2 million in the previous quarter
- Market Capitalization: $1.24 billion
Translating to "of the mountain" in Spanish, Fresh Del Monte (NYSE:FDP) is a leader in providing high-quality, sustainably grown fresh fruits and vegetables.
The company has a rich and storied history dating back to 1886 when it was founded as the California Fruit Canners Association in San Francisco, California. Its early focus was on canning and preserving fruits to meet the growing demand for convenient, shelf-stable produce. As the company expanded and technology allowed for longer storage times, it not only processed fruits but also began cultivating them.
Over the last century, Fresh Del Monte has diversified its offerings, which now include bananas, pineapples, melons, tomatoes, avocados, and citrus fruits, among others. It’s also expanded its global reach, establishing owned and operated farms and production facilities in various countries.
These assets are strategically located in regions known for their ideal growing conditions to ensure a year-round supply of produce. Fresh Del Monte’s global footprint also enables its products to adorn the shelves of supermarkets, restaurants, and households in over 100 countries.
Supplementing the company’s distribution capabilities is its active engagement with consumers. Fresh Del Monte promotes healthy eating habits by sharing recipes and nutritional information, encouraging consumers to incorporate more fruits and vegetables into their diets. This commitment to consumer well-being aligns with the growing demand for nutritious, convenient, and sustainably sourced foods.
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 Calavo Growers (NASDAQGS:CVGW), Dole (NYSE:DOLE), and Mission Produce (NASDAQGS:AVO) along with private companies Chiquita Brands International and Sunkist Growers.Sales Growth
Fresh Del Monte Produce is larger than most consumer staples companies and benefits from economies of scale, giving it an edge over its smaller competitors.
As you can see below, the company's annualized revenue growth rate of 1% over the last three years was weak for a consumer staples business.
This quarter, Fresh Del Monte Produce missed Wall Street's estimates and reported a rather uninspiring 1.8% year-on-year revenue decline, generating $1.11 billion in revenue.
Gross Margin & Pricing Power
We prefer higher gross margins because they make it easier to generate more operating profits.
Fresh Del Monte Produce's gross profit margin came in at 7.3% this quarter, down 1.3 percentage points year on year. That means for every $1 in revenue, a chunky $0.93 went towards paying for raw materials, production of goods, and distribution expenses.
Fresh Del Monte 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 7.8% gross margin over the last two years. Its margin, however, has been trending up over the last 12 months, averaging 1.2% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment.
Operating Margin
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, Fresh Del Monte Produce generated an operating profit margin of 4%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.
Zooming out, Fresh Del Monte Produce 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 3.7%. Its margin has also seen few fluctuations, meaning it will likely take a big change to improve profitability.EPS
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q1, Fresh Del Monte Produce reported EPS at $0.34, down from $0.55 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.
Between FY2021 and FY2024, Fresh Del Monte Produce cut its earnings losses. Its EPS has improved by 26.3% on average each year.
Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 12.2% year-on-year increase in EPS.
Cash Is King
If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
Fresh Del Monte Produce broke even from a free cash flow perspective in Q1. This quarter's result was in line with its margin in same period last year.
Over the last eight quarters, Fresh Del Monte 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 1.7%, subpar for a consumer staples business. However, its margin has averaged year-on-year increases of 2.1 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 revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).
Fresh Del Monte Produce'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 historically did a subpar job investing in profitable business initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, Fresh Del Monte Produce's ROIC averaged 1.5 percentage point increases. This is a good sign, and we hope the company can continue improving.
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.
Fresh Del Monte Produce reported $42.2 million of cash and $407.2 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 $135.3 million of EBITDA over the last 12 months, we view Fresh Del Monte Produce's 2.7x net-debt-to-EBITDA ratio as safe. We also see its $9.8 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 Fresh Del Monte Produce's Q1 Results
We struggled to find many strong positives in these results. Its revenue, gross margin, and EPS missed analysts' estimates. The poor performance was mostly driven by lower banana volumes and prices.
On April 30, 2024, the company also declared a quarterly dividend of $0.25 per share, payable on June 7, 2024 to shareholders as of May 16, 2024.
Overall, this was a mediocre quarter for Fresh Del Monte Produce. The stock is flat after reporting and currently trades at $26.03 per share.
Is Now The Time?
Fresh Del Monte Produce may have had a tough 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 Fresh Del Monte Produce, we'll be cheering from the sidelines. First off, its revenue growth has been weak over the last three years. And while its EPS growth over the last two years has been fantastic, 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 relatively low ROIC suggests it has struggled to grow profits historically.
While we've no doubt one can find things to like about Fresh Del Monte 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 $31.50 per share right before these results (compared to the current share price of $26.03).
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.