FDP - Fresh Del Monte Looks Like A Healthy Opportunity At Only 0.6x P/B
2023-09-18 21:41:31 ET
Summary
- Fresh Del Monte's Q2 results show a record cash balance of $43.8 million, with gross profits up 45% to $116.8 million.
- The recent rise in gross margins was driven by higher banana profitability in the first half of the year, but long-term results show good shareholder returns and increasing trends.
- Trading at a P/B value of 0.60x and earning average ROE of 7.4% since 2011, this would yield a 12.4% investors' adjusted ROE at the current share price.
Shares of Fresh Del Monte ( FDP ) have my attention again as the company is only trading at 8.9x TTM P/E with great results seen from the banana segment in the recent quarters. The company is only decently profitable but also trades at only 0.6x price-to-book, helping potential returns look strong. Fresh Del Monte has been able to increase its book value and dividends over the long term as this article will discuss and currently has a dividend yield of 3.14% with record cash on the balance sheet. Since I l ast wrote about Fresh Del Monte in December 2021, the company has had a total return of 6.75% compared to the S&P 500's return of negative 2.16% over the same period. In an expensive equity market with inflation still running high, this boring consumer staple company looks like a good long-term opportunity.
Latest Q2 Results
Fresh Del Monte has had a great year leaving cash on the balance sheet at recent records of $43.8 million. The second quarter continued this trend with gross profits up $36.1 million (+45%) to $116.8 million compared to $80.7 million in Q2 2022. Gross profit benefited from lower product and distribution costs in the fresh and value-added products segment combined with higher banana profitability. The banana segment generated gross profits of $50.5 million due to the gross margin for the segment expanding to 11.3% from 5.3% in the prior year quarter. Moving down the income statement, operating income for the second quarter of 2023 was $72.1 million compared with $34.3 million in Q2 2022. EPS in the quarter was $0.99 compared with $0.44 in the prior year.
The continued strong Q2 built on the good first quarter with the rise in gross margins driving profitability. While sales were roughly flat YoY (-1.6%), gross profit increased $43.3 million (+25.4%) driven by high banana segment gross profits rising $33.7 million (+56.1%) with gross margins rising for the segment to 10.7% from 7.2% in the prior six month period.
The rise in banana profitability was primarily the result of higher per unit selling prices in Europe and North America and higher sales volume in Asia, Europe, and North America. SG&A expenses remain under control and were $46.8 million in the quarter compared to $47.3 million in Q2 2022. This continues a downward trend and cost discipline over the past 5 years that has seen SG&A decrease around 3.1% in total from 2018 levels. Due to the strong banana segment, for the TTM period as of Q2 2023, EPS is now $2.87 compared to $0.77 in the prior year period.
Q2 2023 Sales Breakdown (from company Q2 2023 company results)
A Quick Intro to the Company
Fresh Del Monte has a long history dating back to 1886, and over the years, has established itself as a household brand known for quality, originally arising from its canned produce. The company is a global vertically integrated producer, transporter, marketer, and distributor of over 100 products with 40,000 employees globally. The company has over 6,700 farms globally with 97,000 acres under production across 21 countries and sales in 80 countries. For the last fiscal year 2022 , its product breakdown was bananas (47%), other fresh produce (42%), and prepared food (11%).
Profitable Slow Growth
Fresh Del Monte's vertically integrated operations with land, processing, and distribution facilities have allowed the company to achieve decent returns in the commodity fresh produce industry. Since 2011, the company has achieved average return on equity and return on invested capital of 7.4% and 7.1%, respectively. This level of profitability is well below my rule of thumb of 15% ROE and slightly below the 9% ROIC I like to see, but Fresh Del Monte's long history and rising book value per share over the past decade, gives me confidence the 7.1% ROIC is acceptable for the company to maintain and continue to grow operations. As always an investor's return is based on what you are paying for that equity on the balance sheet in the stock market and with Fresh Del Monte trading at 0.60x book value, the investors' adjusted ROE is starting to look very opportunistic as will be discussed later.
Profit & Growth History at Fresh Del Monte (compiled by author from company financials)
Excess Cashflow from Vertical Integration
Strong businesses with global brands and scale such as Fresh Del Monte are able to generate cash beyond what is needed to fund operations. With capital expenditures taking up an average 44% of cash flow from operations since 2016, this leaves approximately 56% to be returned to investors in the form of dividends and share repurchases. With average cash flow from operations of $148 million over the past three years, this 56% would imply free cash flow to shareholders of $82 million for around a 6.7% free cash flow yield at the current $1,225 million market capitalization. While this might not seem like a high yield by itself, adding a conservative 3% growth rate to represent Fresh Del Monte growing alongside the global economy takes this yield above my target 9% rate.
Cash Flow Analysis of Fresh Del Monte (compiled by author from company financials)
Conservatively Financed
While Fresh Del Monte could increase leverage to boost ROE, the company seems to have a policy of maintaining a conservative capital structure. Over the past decade, finance leverage at the company has stayed within 1.4 to 1.9x. While leverage has increased in the past couple years, the company currently sits with financial leverage at 1.65x, leaving interest coverage at a healthy 7.0x level.
Financial Leverage & Shares Outstanding (compiled by author from company financials)
However, this conservatism does not mean that the company has not been buying back shares to support EPS. Since 2011, share count has fallen an average of 1.7% annually from 59 million at the fiscal year end 2011 to 48 million for the most recent period. When this average share buyback is combined with the 3.1% dividend, total shareholder yield improves to 4.8%. The dividend payout ratio remains low around 30% for the past three years and with record cash on the balance sheet I would expect shareholder returns, whether dividends or share repurchases, to increase in the coming quarters.
Getting a Sense of Valuation
Fresh Del Monte's 8.9 TTM P/E ratio can also be expressed as an 11.3% earnings yield but I also always like to examine the relationship between average ROE and price-to-book value in what I call the Investors' Adjusted ROE, especially for cyclical companies. It examines the average ROE over a business cycle and adjusts that ROE for the price investors are currently paying for the company's book value or equity per share.
With Fresh Del Monte earning an average ROE of 7.4% since 2011 and shares currently trading at a price-to-book value of 0.60x when the price is $25.45, this would yield an investors' Adjusted ROE of 12.4% for an investors' equity at that purchase price, if history repeats itself. This is well above the 9% that I like to see, before adding a 3% growth rate to represent this mature company growing alongside global GDP.
Potential Shareholder Yields (compiled by author from market data and company financials)
Takeaway for Investors
Fresh Del Monte looks like a good opportunity in an expensive market with the company only trading at 8.9x TTM P/E (11.3% earnings yield) with great results seen from the banana segment in the recent quarters. However, a longer-term free cash flow analysis yields a more conservative 6.7% yield figure. While the company is only decently profitable, it also trades at only 0.6x P/B, helping yield a solid potential long-term investors' adjusted ROE around 12.4%. With record cash on the balance sheet, I would expect increased shareholder cash returns in the quarters to come, especially if profitability in the banana segment continues its recent strength.
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Fresh Del Monte Looks Like A Healthy Opportunity At Only 0.6x P/B