2023-04-18 01:54:01 ET
Summary
- A strong revenue base following the merger and divestiture of the vegetable segment should allow DOLE to hit its revenue estimates but there is a lack of growth.
- It pays a small, but extremely safe, dividend that could be right for a dividend portfolio.
- There are concerns over employee morale that may end up as trouble down the road.
- Overall, I think this stock is a buy for the dividend, but don't expect capital appreciation any time soon.
Dole plc (DOLE), ~$1.2B market cap company, is one of the largest fruit producers in the world, with a focus on bananas and pineapples. They also distribute fruit to more than 75 countries. In 2021, Dole went public after a merger with Total Produce. Since then, they sold their unprofitable vegetable business to Chiquita for $293mm when Dole management wanted to send a message that they are focusing in on their core business, which is also profitable.
Let's dive into the details in this bird's eye view of DOLE.
Revenue
DOLE only recently IPO'd in 2021, but thankfully some of the data platforms have aggregated their past revenue into their charts. We can see here that DOLE held steady for many years, barely growing since 2008, until 2018. Their revenue didn't really jump until the Total Produce merger. Normally we're going to want to see revenue growth over time, and preferably a nice 45-degree angle up and to the right. DOLE doesn't have that here, at least prior to the merger.
Forward revenue estimates for DOLE going forward are similarly disappointing, and it is expected to continue on its sideways trajectory. Overall, I don't care at all for the revenue curve (less curve and more straight line), and in a moment you'll see the curves of its competitors.
Income Statement | FY2022 | FY2023E | FY2024E | FY2025E |
Revenue | 9,229 | 9,124 | 9,055 | 9,306 |
YoY Growth (%) | 42.99% | (1.14%) | (0.75%) | 2.77% |
Source: Sentieo
Business segments gross revenue (in ):
Total Revenue | FY2018 | FY2019 | FY2020 | FY2021 | FY2022 |
Europe-Non-Eurozone | 1,688 | 1,582 | |||
Europe-Eurozone | 1,671 | 1,509 | |||
International | 1,092 | 1,134 | |||
Fresh Fruit | 1,133 | 3,047 | |||
Fresh Vegetables | 511 | 1,206 | |||
Diversified Fresh Produce - EMEA | 3,120 | 3,383 | 3,153 | ||
Diversified Fresh Produce - Americas & ROW | 1,226 | 1,465 | 1,966 | ||
Inter-segment revenue | (59) | (58) | (37) | (142) | |
Segment Total | 4,393 | 4,167 | 4,346 | 6,454 | 9,229 |
Source: Sentieo
Here's a breakdown of their business segments. These numbers are gross revenue. The fresh vegetables segment actually never made money, and lost $33M in FY2022. Thankfully they've sold that off and it's not causing a drain on company resources anymore.
Valuation
DOLE's closest comps are most likely Del Monte, Mission, and Calavo. DOLE performs well here, coming in at the bottom of the pack in valuation, suggesting either an undervaluation or investor pessimism. Let's take a look at their competitor's revenue curves for a better idea of which is which.
We can see FDP, Del Monte, comes in with a much, much stronger revenue curve than DOLE does. I'm willing to pay up for that, and it looks like other investors are as well. Calavo's growth is similarly impressive (difficult to see on this chart due to scaling). FDP and CVGW have very similar valuations, a bit higher than DOLE, and this is a big reason why. They actually have growth, unlike DOLE.
Let's look at profit margins.
Here's another place that we see DOLE's comps outperforming. All of their margins dropped, largely due to increased transportation and production costs as high fuel prices and inflation reigned. They all do better than DOLE, albeit only slightly in the case of FDP. A good margin will be very important if we do actually move into a recessionary environment in 2023 (which I doubt), and is something to keep in mind if you're concerned about that.
Debt
This divestiture of the vegetable business will help Dole get below their leverage target, which is an extremely prudent use of capital received for selling a money losing business. Leverage should come down just below 3x when the deal is completed, and this will allow Dole to be nimble and enable future M&A. Dole has stated their interest specifically in lowering their debt with the infusion of cash, which I like.
DOLE currently has an interest coverage ratio of 1.9x, so there shouldn't be any concerns in servicing even this high amount of debt in the meantime, but it's lower than I'd like. I'd be concerned if they didn't have a plan in place to lower the principle.
Dividend
Dole pays a small quarterly dividend of $.08, for a yield of roughly 2.7% at present. They have made it clear they intend to continue paying this to their shareholders, and is probably one of the best reasons to own the stock. It's not an impressive dividend, but the revenue of the company is stable and the payout ratio is low and easily sustainable.
Operations
Dole shares took a beating after their IPO trading down as much as 60% from the 2021 IPO price of $15. I think it's important to understand what drove the stock down in a such short period, outside of broader market action, so let's explore that.
Margins took a significant hit due to increased freight and labor costs in 2022. Thankfully though freight costs stabilized at much lower levels in 2023, and this is no longer a major issue for Dole unless energy prices rise again. They very well might given what's going on with OPEC+ at the moment. This is a concern given their low margins at present.
Listeria contamination linked to Dole leafy greens resulted in large recalls in December of 2021, followed by severe crop failure rates in California during early 2022. Dole sold the fresh vegetable division, which was lossmaking, so this overhang is completely removed from the stock.
Now that Dole has focused on their core business, we are much more confident in their operations and ability to recognize expected synergies from the merger with Total Produce. The company projects between $30 - $40mm in synergies from the merger and these have not been realized yet. The plethora of issues popping up in 2021-2022 were the main reason for this, and management was proactive in addressing it.
With their sale of the vegetable segment complete and a buydown in their debt, this will put financial leverage below the company's stated 3x target and Dole can consider share buybacks, M&A, and growth investments. Perhaps dividend increases as well. If you believe in management, this flexibility could create huge catalysts for upside in the stock.
Leadership
Dole's CEO, Rory Byrne, served as the CEO of Total Produce since 2006, before taking the reins at the new company. During his tenure at Total Produce, he helped to triple revenues while sustaining profitability. He has more than 30 years of industry experience and is widely considered to be a savvy operator.
Reviews on the company by employees at Glassdoor.com are not great, coming in at 3.4/5 stars. Most complaints center around senior management and poor upward mobility. The CEO has a terrible 41% approval rating from employees, which cratered from 90% approval before the merger.
CEO Approval Rating (Glassdoor)
When I see something like that I have to wonder what's going on. Now frequently things can look very chaotic in a merger, especially one of this size, but now well after the fact things should have gotten back to normal in a well ran company. An employee review from August of 2022 states:
Toxic leadership with no strategic vision or plan to achieve aggressive growth goals in mature categories; this insecurity breeds deceitful and borderline unethical behaviors among upper levels of management.
Management lacks professional business etiquette, for instance, bad mouthing global execs and former employees to their lower level employees, and re-directing blame to lower employees while shielding themselves from any accountability.
Constantly changing agencies and vendors, challenging contracts when vendors fail to hit unachievable expectations with lackluster briefs and shrinking budgets.
No onboarding, training, or leadership development. Performance reviews have disappeared as management sheds employees that challenge them with different points of view Immense amount of turnover in many areas of the business, due to unrealistic deadlines and lack of resources.
Source: Glassdoor .
Conclusions
While the new Dole PLC had a rocky start post-IPO, management has already proven that they will not be complacent. No matter how you dice it, agriculture is a really tough business with thin margins. Dole ran the gamut post-IPO with droughts, Listeria, rising bunker fuel costs and rising shipping costs.
Now that they have put the vegetable business behind them, fuel and shipping costs have also come down significantly. The company got lean to adjust to exploding costs, and any future drop or stabilization in these costs, goes straight to the bottom line. We also expect to see the synergies that were promised at IPO, in the range of $30-$40mm, delivered in the coming year.
At the same time, the price of bananas and pineapples are up and should stay higher in 2023, management already guided to better pricing contracts this year. All of this makes me think it is likely that Dole can make 2023 expectations on both the top and bottom lines.
Agriculture is not the best business from a profitability standpoint and there are many external factors that are out of the company's control. It is understandable that Dole trades at discount given all that has happened in the last 2 years, but as things normalize, the multiple should expand. Dole navigated the worst possible operating environment over a 2-year period as everything worked against this business, they took it in stride.
Their dividend also appears very safe, and management has stated a desire to return value to shareholders. The dividend is probably the biggest reason to own the stock at the moment, as capital appreciation could take a few years to really materialize.
On the downside for this stock is employee morale. I'm very concerned over employee reviews of the company, and especially the trend down in CEO approval following the merger. It's clear employees are unhappy with the current state of affairs in the company, and that sort of thing can deteriorate very rapidly.
Overall I will give this a buy rating, but with a caveat. Buy it for the dividend in a dividend portfolio, don't buy this one expecting to make a ton in capital appreciation. With the poor revenue curve and forward estimates showing sideways movement it'll be difficult for investors to get on board with this company. But, I believe the dividend is safe and will likely get increased in the future given the low payout ratio as management will want to attract new investors.
About this article: When I research stocks I start with a "bird's eye view" of the target company. Many of the things I went through in this article are what I'll look at first. I want to make sure the company grows year over year with a nice revenue curve. I want to make sure their debt is serviceable and preferably getting paid down. I want to make sure shareholders get a return on their investment through a good ROE. I want to see how the company is handling its dividends and are they sustainable. I want to look at the share float and make sure they aren't decreasing share value by inflating it. And finally, I want to look at the leadership and see what employees think about them.
When this bird's eye view is complete, I'll decide if I want to avoid the company for the time being or if it's a potential candidate for investment. This article that you are reading is the result of my bird's eye view examination. It is designed to be an overall high level view of the company that you can read to determine if this company is something that you might consider as a candidate for investment. You should not take my final conclusion on the company as your sole recommendation for investment, and you should conduct further in-depth research on your own to come to your final conclusions.
As a result of this, my "buy" recommendations come with an asterisk. And that asterisk is that this is only a high-level examination, and in-depth research that can take many hours, or days, of your time is still required. This is why my articles are short and to the point, with no fluff or filler. Just the facts that you need to know to move forward.
For further details see:
Dole: Despite Stagnant Revenue Growth, Still A Decent Buy For The Dividend