FDP - Fresh Del Monte: Cheapest Valuation In 20 Years = Ben Graham Strong Buy

2023-11-02 13:28:04 ET

Summary

• Fresh Del Monte Produce is trading at its cheapest business valuation in decades, presenting a unique investment opportunity.
• A forward dividend yield of nearly 4% and P/E under 10x are very attractive.
• I estimate the company's liquidation value is above $40 per share, almost double the current quote, making it a potential target for activists and private equity.

One sector of the market where I am focusing my research time is the food production and processing industry. Many in the group are trading at 10 or even 20-year low valuations. One of the poster-child picks just reported a slight miss for quarterly sales and earnings, Fresh Del Monte Produce ( FDP ). Despite 5-year high profit margins, its strongest balance sheet in many years, and tangible book values well above the stock quote, shares slid another -14% yesterday (November 1st, 2023).

The resulting valuation for new investment has now reached its most bullish position since 2004, if not 1998. Where else can you find a brand-name food company selling for a 20-year or 25-year low presently, relative to historical valuations?

To boot, current and forward dividend payouts stated by management are $0.80 annually, which works out to a nearly 3.8% dividend yield on yesterday's $21 price. Plus, this payout rate represents roughly 30% of trailing and forward estimated earnings, with plenty of room to raise cash distributions.

Even better news is this fully integrated farm, processing, canning, warehousing, shipping and delivery outfit will benefit from rising inflation throughout the world. In terms of a liquidation value, I am coming up with numbers likely north of $40 a share, meaning activists and takeover experts should be looking at Fresh Del Monte as I am writing this story.

The entire bullish proposition is one Ben Graham would love, author of several best-selling value-investing books written back in the 1930s ( Security Analysis ) and 1940s ( The Intelligent Investor ). Simple to understand physical assets, few liabilities, real profits, and substantial cash flow generation are all available at a major discount to usual trading/fundamental worth patterns.

I am confident enough in the value logic, I have made FDP one of my largest single company positions today. Its robust income yield and defensive business-model characteristics for owners are added bonuses. Remember, vegetable & fruit demand is relatively recession-proof. I am putting a Strong Buy on shares for a rating. Let me explain why.

The Business

Fresh Del Monte is one of the world's leading vertically-integrated growers, producers, distributors and marketers of fresh fruits & vegetables. The company owns farmland, maritime ships, trucks, distributor warehouses, and food processing plants, for starters.

The company is somewhat unique in its diversity and geography selling fresh foods to customers around the planet, with its highest customer counts located in North America and Europe.

To give you an idea of the number of properties held and hard asset backing for each ownership share, I have taken a summary list provided in the 2022 10-K filing and posted it below. The largest concentration of assets are in Costa Rica (fresh produce farms), the United States, and Canada, but Fresh Del Monte is truly a global outfit.

North America We operate a total of 27 distribution centers in the United States and Canada, of which 15 are also fresh-cut facilities. We own 12 of our distribution centers including our distribution center in Houston, Texas, a 200,000 square foot distribution center in Dallas, Texas, distribution centers in Plant City, Florida, Goodyear, Arizona, Kankakee, Illinois, Portland, Oregon, and a repack facility in Winder, Georgia. In Yuma, Arizona, we also have a manufacturing facility and a cooling facility while in California, we own production facilities in Gonzales as well as in the Salinas valley. We also operate a distribution center with a fresh-cut facility in Ontario, Canada on owned land. The remaining 15 distribution centers are leased from third parties. All of our distribution centers have ripening capabilities and/or other value-added services. We own an avocado packing facility in Uruapan, Mexico. We also lease four port facilities that include cold storage capabilities.

Europe We own and operate a fresh-cut fruit facility in Wisbech, England. In Larissa, Greece, we own and operate a production facility for prepared fruit, tomato products and snacks. In Frankfurt, Germany, we own a distribution center which is currently held for sale.

Asia Our products are distributed from four leased distribution centers located at strategic ports in Japan with cold storage. In Japan, we also operate three fresh-cut fruit facilities. One is owned and the other two are leased. In Hong Kong, we lease a distribution center. In addition, we lease two distribution centers in South Korea and own one facility that includes a fresh-cut fruit and vegetable operation. Our distribution centers include ripening technology and other value-added services.

Central America In Costa Rica, we own [43,807 acres for farming], a juice processing plant, an IQF (individually quick frozen) fruit processing plant, and greenhouses where we produce tomatoes and other vegetables for sale in the local market. We also own greenhouses in Guatemala [and 8,655 acres for farming]. In Panama, we have a banana operation on leased land; approximately 2,500 acres of this leased land were under production at the end of 2022.

South America In Brazil, we own approximately 28,000 acres of land of which 1,800 acres are under production. In Uruguay, we own approximately 7,800 acres. In Chile, we own approximately 6,500 acres of land, of which approximately 2,900 acres are primarily used for production of non-tropical fruits. We also lease approximately 1,500 acres in Chile for non-tropical fruit production.

Africa In Thika, Kenya, we own and operate a warehouse, a pineapple cannery, a fresh pineapple packing facility, and a juice production facility.

Middle East In Jordan, we own an integrated poultry business including poultry farms, hatcheries, a feed mill, a poultry slaughterhouse and a meat processing plant which relate to our other products and services segment. In Jordan, we also own a 25-acre hydroponic greenhouse on leased land where we have a fresh-cut processing center. In the UAE, we lease a combined distribution and manufacturing center in Dubai. This facility includes fresh-cut fruit and vegetable operations, an ultra-fresh juice manufacturing operation and prepared food manufacturing. In Saudi Arabia, we own 60% of a joint venture that owns two strategically located distribution centers in Jeddah and Riyadh as of year-end 2022. We entered into an agreement to sell these two facilities, and leaseback a portion of the space, in the first quarter of 2023. In Kuwait, we have an F&B store and we lease a facility for manufacturing and/or distribution of fresh-cut and fresh produce, and ultra-fresh juices.

Other Properties We own our U.S. executive headquarters building in Coral Gables, Florida, our Central America regional headquarters building in San Jose, Costa Rica and our South America regional headquarters building in Santiago, Chile. We own our office space in Guatemala City, Guatemala and Amman, Jordan. Our remaining office space in North America, Europe, Asia, Central and South America and the Middle East is leased from third parties.

The sales breakdown by goods category plus improving profit margins on the whole group since the worst days of the pandemic shut-ins are highlighted below. Bananas are the #1 food item sold.

Relatively steady profit margins over time are one calling card of the company. For investors, margins over the last 12 months have reached the strongest level since 2017. Interestingly, the stock quote is no longer tracking rising margins during 2023, breaking past correlations.

In addition, the balance sheet has witnessed a sizable drop in debt over the last 24 months, after a big jump in 2018-19. Net-net, total liabilities to assets are today standing at a somewhat below normal position, looking back to 1998 (25 years ago). So, the stock price slide this year is a head-scratcher.

The one area I do believe needs addressing by management is cash flow generation. On sales (drawn below) or debt (not pictured), room for higher cash margins exists, and would be a welcome development for shareholders.

Killer Valuation Stats

If you are targeting sound hard-asset valuations for your investment money, Fresh Del Monte should be near the top of any research list. For me, the single most persuasive data point for new buyers is this food/farm economy pick is priced at its largest discount to net tangible assets since the 1990s. Below is a graph of the equity market capitalization vs. tangible asset (cost-adjusted-to-use) book value setup back to 1998.

When you think about the depreciation of buildings (alongside some plant & equipment) over the decades likely resulting in the undercounting of actual liquidation worth, an investor can understand why I am getting ultra-bullish on this name.

After we consider inflation has almost surely pushed land and building worth far above purchase-cost, then depreciated accounting of these assets, a complete liquidation breakup of the company may be able to "net" owners a sum of $2 billion for my starting estimate, far above $1.47 billion in reported tangible book. Let's analyze the investment puzzle.

For example, the $704 million original cost number for land (farms and under warehouses, processing plant buildings), mostly held for decades, could easily be worth DOUBLE this number from real estate inflation, pushing tangible book value to $2.17 billion, without even looking at actual building value changes (held at an original cost number of $607 million, and depreciated since, while resale values in the real estate world have risen).

All told, if a net liquidation worth of $2+ billion exists right now (after all liabilities and debts are paid), the equity market cap of $1.05 billion (at $21 a share) is a sizable 50% discount (at a minimum) to real-world asset values! Consequently, if you are searching for hard assets to buy at a discount, FDP is a top choice today.

Fundamental Ratio Analysis

Other statistics argue Fresh Del Monte is incredibly inexpensive today. Frist, we can review simple price to earnings and sales multiples. What we find is FDP is selling at its lowest valuation since 2009, if not earlier. 7.5x trailing earnings and 0.24x sales are better than 50% discounts to long-term averages for the company.

When we include changing debt and cash levels, to get a fuller picture of FDP's net takeover price, enterprise valuations are equally as cheap. EV to basic cash EBITDA generation of 4.8x is the lowest since 2004.

EV to revenues of 0.32x is the lowest ratio since 1998, a good 25 years ago, and a 40% discount to multi-decade normal pricing.

The dividend yield story is also quite impressive at share pricing in the low-$20s. The chart below is through a few days ago (the current trailing rate is 3.25%), but we can see Fresh Del Monte's nominal rate and relative setting vs. the S&P 500 is the best since 2006.

Overall, Seeking Alpha's computer ranking system puts a Valuation Grade of "A-" on shares, compared to peers and FDP's 5-year averages on a variety of metrics. You can review the extended list of valuation ideas below.

Final Thoughts

Fresh Del Monte is a very intriguing deep value and asset breakup play. I am not overly concerned about the minor earnings/sales miss last quarter. This company has a history of wild swings in results (lumpy) from quarter to quarter. Q3 numbers are also historically slow from a seasonal perspective over the decades.

It is quite possible, weak-hand holders are giving up on the stock after years of going nowhere. I will gladly step in and take their shares. A phase of capitulation could be the story in early November 2023 (on the 3-year low for shares), with a smart reversal in price and renewed trend higher for several years approaching.

What are the investment risks? For sure, business-plan execution is important. Keeping labor wages under control, and potentially getting lucky on energy prices (declining crude oil, gasoline, diesel) next year could goose operational profitability in a very positive way.

The company does have a major concentration of farm assets in Costa Rica. The good news is property rights are enforced for domestic and foreign owners, while the economic/political situation is considered one of the more stable in Central America. However, any dramatic change in this advantageous setup for Fresh Del Monte would be an unwelcome development for the share quote.

A final risk is more macroeconomic in nature. Basically, any material markdown of equities on Wall Street generally could keep a lid on Fresh Del Monte's price for a spell. While the odds of such a scenario are decent, I do fully suspect and expect FDP will begin to "outperform" the S&P 500 index going forward. Plus, any further price downside will only serve to open an even better long-term entry for purchasing shares. In a worst-case scenario of deep recession and another bear market in U.S. equities, I find it hard to believe FDP's price will fall under $15 and stay there (-30% from $21). A $15 price would essentially be equal to one of the lowest relative valuations to the S&P 500 ever.

I am projecting EPS could easily rise into the $3 to $4 range by 2025, because of the company's uniquely integrated and impressive fixed-cost business design. Rising inflation in the economy over time, which may accelerate again when the Federal Reserve decides it wants to move to easy credit conditions to prevent a serious recession next year, should be net positive for income generation at FDP.

In addition, forecasting a double in the dividend payout over the next 2-3 years is not rocket science, assuming earnings and cash flow move in a bullish direction. I am anticipating income and cash flow margins will continue improving over time. So, a $40 to $50 share quote may become reality by 2025-26. If such takes place, Fresh Del Monte's total return for buyers at $21 would be in the 35%-50% annualized range over the next 2-3 years.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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