Calavo (CVGW)

Fresh produce company Calavo Growers (NASDAQ:CVGW) fell short of the market’s revenue expectations in Q4 CY2024, but sales rose 21% year on year to $154.4 million. Its non-GAAP profit of $0.33 per share was 13.8% above analysts’ consensus estimates.

Company Overview

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

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 (NASDAQ:AVO) along with private companies Chiquita Brands International and Sunkist Growers.

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $688.3 million in revenue over the past 12 months, Calavo is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers.

As you can see below, Calavo struggled to generate demand over the last three years. Its sales dropped by 14.7% annually, a tough starting point for our analysis.

This quarter, Calavo generated an excellent 21% year-on-year revenue growth rate, but its $154.4 million of revenue fell short of Wall Street’s high expectations.

We also like to judge companies based on their projected revenue growth, but not enough Wall Street analysts cover the company for it to have reliable consensus estimates.

Calavo has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 10.7% gross margin over the last two years. That means Calavo paid its suppliers a lot of money ($89.28 for every $100 in revenue) to run its business.

This quarter, Calavo’s gross profit margin was 10.2%, in line with the same quarter last year but missing analysts’ estimates by 2%. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key profitability metric because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.

Calavo was profitable over the last two years but held back by its large cost base. Its average operating margin of 3.2% was weak for a consumer staples business. This result isn’t too surprising given its low gross margin as a starting point.

Analyzing the trend in its profitability, Calavo’s operating margin might fluctuated slightly but has generally stayed the same over the last year, meaning it will take a fundamental shift in the business model to change.

In Q4, Calavo generated an operating profit margin of 3.3%, up 4 percentage points year on year. The increase was encouraging, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, and administrative overhead.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Calavo’s EPS grew at an astounding 108% compounded annual growth rate over the last three years, higher than its 14.7% annualized revenue declines. This tells us management adapted its cost structure in response to a challenging demand environment.

In Q4, Calavo reported EPS at $0.33, up from negative $0.01 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 Calavo’s full-year EPS of $1.45 to grow 17.7%.

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.

Calavo broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Calavo historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.4%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Calavo is a well-capitalized company with $48.49 million of cash and $24.79 million of debt on its balance sheet. This $23.7 million net cash position is 5.9% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was encouraging to see Calavo beat analysts’ EPS expectations this quarter. On the other hand, its revenue and EBITDA fell short of Wall Street’s estimates. Overall, this was a softer quarter, but the stock traded up 1.1% to $22.04 immediately following the results.

Updated: May 15, 2025 at 10:39 PM EDT

Before deciding whether to buy Calavo or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Calavo isn’t a terrible business, but it doesn’t pass our bar. First off, its revenue has declined over the last three years. And while its EPS growth over the last three 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 brand caters to a niche market.

Calavo’s P/E ratio based on the next 12 months is 15.3x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $35 on the company (compared to the current share price of $25.65).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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