Calavo (CVGW)

Fresh produce company Calavo Growers (NASDAQ:CVGW) missed Wall Street’s revenue expectations in Q1 CY2025 as sales rose 3.3% year on year to $190.5 million. Its non-GAAP profit of $0.40 per share was 25% below 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.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years.

With $694.5 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’s revenue declined by 15.8% per year over the last three years, a tough starting point for our analysis.

This quarter, Calavo’s revenue grew by 3.3% year on year to $190.5 million, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to decline by 1.8% over the next 12 months. it's tough to feel optimistic about a company facing demand difficulties.

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

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 10.5% gross margin over the last two years. Said differently, for every $100 in revenue, a chunky $89.49 went towards paying for raw materials, production of goods, transportation, and distribution.

This quarter, Calavo’s gross profit margin was 9.5%, down 1.5 percentage points year on year and falling way short of analysts’ estimates. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, 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 an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Calavo was profitable over the last two years but held back by its large cost base. Its average operating margin of 3.1% was weak for a consumer staples business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, Calavo’s operating margin rose by 1.1 percentage points over the last year.

In Q1, Calavo generated an operating margin profit margin of 4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Calavo’s EPS grew at an astounding 182% compounded annual growth rate over the last three years, higher than its 15.8% annualized revenue declines. This tells us management adapted its cost structure in response to a challenging demand environment.

In Q1, Calavo reported EPS at $0.40, down from $0.50 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Calavo’s full-year EPS of $1.35 to grow 41.2%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

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 5.6%, 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 $60.36 million of cash and $24.64 million of debt on its balance sheet. This $35.72 million net cash position is 7.2% 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.

We struggled to find many positives in these results as Calavo fell short of Wall Street’s estimates across all key metrics. Overall, this quarter could have been better. The stock traded down 15.3% to $23.42 immediately after reporting.

Updated: June 14, 2025 at 10:35 PM EDT

Before making an investment decision, investors should account for Calavo’s business fundamentals and valuation in addition to what happened in the latest quarter.

We see the value of companies helping consumers, but in the case of Calavo, we’re out. For starters, its revenue has declined over the last three years. And while its projected EPS for the next year implies the company will continue generating shareholder value, 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 14.5x. While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $35 on the company (compared to the current share price of $27.86).

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.