CVGW - Calavo Growers Earnings Outlook: How New Leadership Could Influence Results

2024-01-12 15:59:18 ET

Summary

• Calavo Growers, Inc. will soon report fiscal Q4 earnings with estimated EPS of $0.33 and revenue of $271.68 million.
• The company has a new CEO, Lee Cole, who previously served as CEO from 1999 to 2019.
• Historical data shows that under Cole's leadership, the company had much better average earnings and revenue numbers compared to other managers.

Calavo Growers, Inc. (CVGW) is a global avocado distributor. It also has a ready meals segment. The company is reporting fiscal Q4 earnings on January 16, 2024 (post-market). Analysts estimate EPS will come in at $0.33 and revenue at $271.68 million.

There's something unusual going on here because the company brought in a new CEO, Lee Cole, in March 2023. Cole also served as CEO between 1999 and 2019.

The company surprised positively in the first quarter Cole took over, but then surprised on revenue to the downside every quarter. It also surprised, in a big negative way, on earnings for two quarters, before starting to surprise to the upside recently. The trend isn't exactly encouraging. Looking back to 2014, the company beat earnings 47% of the time. Most companies beat earnings ~70% of the time.

The company beat revenue around 46% of the time. That's also unusually low. However, this isn't necessarily bad. It likely means the market doesn't have as high expectations for earnings compared to other companies.

There has only been insider buying in 2023.

I looked back through the data ~10 years. I figured it would be interesting to test whether there were differences in surprise magnitude between this new/old CEO and other management. It turned out there is quite a big difference. On average, earnings surprised -0.70% under Cole. It is unusual for companies to report average earnings misses. However, other managers missed earnings by an average of 14%!

Surprises tend to be larger in revenue. It is harder to move numbers around between quarters. Lee Cole missed revenue estimates by an average of 0.81%. Other managers missed by an average of 3.76%.

This could be due to Cole's superior skills at managing the business, but it could also be the case that new management was unlucky catching a slump in the avocado markets.

The data tells me that the company will most likely not beat. However, I think there is more uncertainty around this earnings print because of new management. In the end, I get to an EPS estimate that's slightly below analysts and a revenue estimate that is slightly above estimates.

What's more important is how the stock will react. I've plotted the share price returns on the day of earnings and it looks like this:

I also looked at the share price response under various scenarios:

These scenarios aren't too predictive because things may be different in the future and the sample size may be too small. For example, I wouldn't count on a sizeable positive return when the company misses earnings. However, it wouldn't surprise me if the share price responds more to revenue misses. It also appears very sensitive to misses on both revenue and EPS.

I segmented share price reactions to earnings between Cole and new management. The average share price reaction under Cole was +0.85%. The share price response under other managers was approximately -5.37%.

A strategy that looked attractive to me given my expectations for earnings is to sell a straddle. In this case, I'm actually selling two in-the-money contracts because the share price fell between strikes. I'm selling a January 19 $30 put and a January 19 $25 call. This leads to the following payoff profile:

Keep in mind that selling options, especially close to expiration, can very quickly lead to large losses. Theoretically, the losses are unlimited. Meanwhile, the wins are small with a max profit of $142.50 per contract.

However, I think this could still be interesting. The strategy breaks even or is better(before trading costs) if the stock price remains above $23.58 and under $31.43. Based on the historical returns around earnings events for CVGW the stock price remained within this range approximately 95.83% of the time. This indicates that in about 96% of past earnings events, the stock price stayed within the specified range of $23.58 to $31.43 when the starting price was $28.05.

I have a slightly bullish bias toward Calavo Growers, Inc. because management may make a big difference. I wouldn't mind selling an additional put or owning common stock through this upcoming call.

For further details see: