2023-09-12 11:09:08 ET
Summary
- Calavo Growers recently posted Q3 FY23 results, with a decline in net sales but an increase in gross profit and income.
- The stock price dropped over 14% on Friday, presenting a buying opportunity as it is now at a strong multiyear support level.
- Despite the decline in sales, the positive outlook, high demand for avocados, and attractive valuation make investing in CVGW rewarding.
Calavo Growers ( CVGW ) distributes avocados and other perishable foods worldwide. CVGW recently posted Q3 FY23 results. The stock price dropped more than 14% on Friday. I think this is the time to act smart and not panic. I will review its Q3 FY23 results in this report. I think this is the time to get greedy when others are fearful. Hence, I assign a buy rating on CVGW due to its attractive valuation and positive outlook.
Financial Analysis
CVGW recently announced its Q3 FY23 results . The net sales for Q3 FY23 were $259.8 million, a decline of 24% compared to Q3 FY22. Both its segments underperformed, which led to a decline in revenues. The revenues from the grown and prepared segment declined by 30% and 14% in Q3 FY23 compared to Q3 FY22. I think the main reason behind the underperformance was a 38% decline in the average selling price of avocados. But despite a 24% decline in revenues and a 38% decline in selling prices of avocados, its gross profit increased by 35.1% in Q3 FY23 compared to Q3 FY22, which is quite impressive. Its gross margins also improved to 9.6% in Q3 FY23, which was 5.4% in Q3 FY22. The management attributed the improvement to strong avocado margins, which the company achieved through better operational execution.
The net income for Q3 FY23 was $6.7 million, which was $1.3 million in Q3 FY22. So, despite a significant decline in sales, their margins and income increased, which is excellent. In my opinion, a decline in sales should not be that much of a concern because the decline was mainly due to lower selling prices and not because of a lack of demand. The avocado volumes in Q3 FY23 were 5% higher than Q3 FY22. So I think the decline in sales might be temporary and we might see increased sales in the coming quarters. Because the demand for avocados is still high and the market for avocados is expected to grow at a healthy rate. The selling prices might have dropped year on year, but it has improved sequentially and is expected to increase in the coming times as the harvest in Mexico has slowed down, but the demand is increasing. Hence, I think the decline in sales in Q3 FY23 is not concerning, as I believe we might see better results in the coming quarters.
Technical Analysis
After making an all-time high of $108 in 2018, the stock has fallen to the level of $28. The stock fell more than 14% on Friday, and you might be thinking that trading in the stock right now might not be a good idea, but I have a different view. I think the big fall can be a great buying opportunity because the stock is now at a strong multiyear support level. The downtrend in the stock started in 2018, and even after five years, the stock is continuing to fall. I believe there wasn’t any significant support level to stop the stock price from falling, and the reason behind no major support level to stop the stock from falling was a crazy bull run that lasted five years. The bull run started in 2013 and lasted till 2018, and in this run, there wasn’t any consolidation or a major correction that happened in the stock. So, there wasn’t any significant or major base formation in the stock. Right now, the stock has reached a multiyear support level, but you must think that the recent monthly candle of September has given a breakdown and is looking bearish. I think this is a classic case of stop-loss hunting. I believe the recent selling just creates panic and throws out the retail investors. The stock tried to break the support level in March 2023 but quickly bounced back, which shows that buyers are active around the support level. The price is at a multiyear support level, so now is the time to act wisely and avoid panicking since investing at the current level can be quite profitable. Hence, I am bullish on CVGW.
Should One Invest In CVGW?
Since 2018, the stock is down 74%. The bull run that started around 2014 and the downtrend that started in 2018 are mainly associated with the company's financial performance. In 2014, the company was profitable after being at a loss in 2013, and since then, the company has started to post healthy revenue growth, and its profitability also improved. In FY14, its net income was $0.1 million, which was $32.3 million in FY18. During these years, the company's financials were impressive, and the market also rewarded its share price during this period. However, the financials of the company started to decline from FY19. Since FY19, its sales growth has become quite volatile, and after being profitable for around six years, it posted a loss in FY20; since then, the company has failed to become profitable. So I think this might be the reason the stock has fallen in recent years. But in recent times, the company's margins have improved, and it is showing signs of a turnaround. In FY22, its net loss was $6.2 million, but its [TTM] net loss was $3.8 million. So, if the company continues to focus on margins, it might soon become profitable.
Regarding market share among its main rivals, CVGW holds the second-highest position.
I believe this is the time to get greedy when others are fearful because the worst is already behind us. After the results, the stock price dropped significantly, and currently, a lot of investors are panicking, but this is the time to act smart and not panic because the future outlook is positive, and the stock is at a multi-year support level. So, investing at the current level can be rewarding.
At last, looking at its valuation. CVGW has an EV / Sales [FWD] ratio of 0.61x, which is lower than the sector median of 1.71x, and it has a Price / Sales [FWD] ratio of 0.51x compared to the sector ratio of 1.12x. The valuation also looks attractive. So, considering its attractive valuation and positive outlook, I think the worst is behind, and investing at the current level can be rewarding. Hence, I assign a buy rating on CVGW.
Risk
Various factors, such as prevailing external conditions, changes in the commodities market, currency fluctuations, alterations in governmental policies and agricultural programs, extended weather patterns, and natural disasters, can impact fresh produce prices and availability. Their operating performance has historically been significantly influenced by rising expenses for purchased fruit, and there is no guarantee that this will not happen in the future. The cost of different commodities might vary depending on their pricing. There can be no guarantee that they will be able to pass on any increases in these expenses to their customers. Fuel and transportation costs comprise a sizeable portion of the price of many of the products they buy from producers. Additionally, since the majority of their products are packaged in cardboard boxes, the price of paper is particularly important to them. Their operating income will fall if the price of paper rises, and they are unable to pass these price increases on to their consumers in a timely manner.
Bottom Line
I think the worst is behind us, and now is the time to act smart because we might see better sales in the upcoming quarters, and selling the stock at this point might not be a smart move. The stock is at a multi-year support level, and the valuation is also attractive. Hence, I assign a buy rating on CVGW.
For further details see:
Calavo Growers: Investors Should Not Panic