2023-04-17 11:23:09 ET
Summary
- Dole's 4Q22 earnings report showed promising results, but was negatively impacted by the underperformance of the Fresh Vegetable and Diversified Fresh Produce EMEA segments.
- Management's cautious approach to guiding for 2023 leaves room for the possibility of an upside surprise.
- A possible catalyst for a valuation re-rating upwards exists if DOLE generates more cash to pay down its debt, resulting in a higher relative multiple.
Overview
This post serves as an update to my coverage in late September and my 3Q22 earnings update last November . Dole plc ( DOLE ), in my opinion, is now fairly valued in the near-term but remains an attractive long over the long-term (as shown in my model below). As such, I am recommending to take any profits available and reduce exposure until valuation gets cheaper (reduce from buy to hold rating). From a technical perspective, DOLE stock has rallied near 100% from the lows of $7+ last September, which makes my believe that some investors might be inclined to take profit soon. That said, from a business perspective, following the release of the 4Q22 earnings report, I continue to remain encouraged by DOLE's Fresh Fruit business's underlying strength.
Operation updates
The quarterly operating results were promising, but were negatively impacted by the underperformance of the Fresh Vegetable and Diversified Fresh Produce EMEA (DFPEMEA) segments of the company. The market is, in my opinion, ignoring the weakness of this division because management announced on 1/30 that it intends to sell the Fresh Vegetable segment that it plans to divest this segment for $293 million, without a specific timeline for closing.
The high price of bananas, the rising value of commercial cargo, and increased pineapple volumes in core markets were all cited by management as reasons for the Fresh Fruit division's rising profits. However, the decline in banana volumes and the rise in associated costs such as procurement, transportation, storage, and processing stymied the expansion of adjusted EBITDA. As expected given the volatility in the FX market, fluctuations in exchange rates were the primary factor limiting revenue growth in the DFPEMEA business. Losses in South African crop yields were cited by management as a contributing factor, as were operational weaknesses in Northern Europe and Ireland. On the other hand, positive EBITDA results were seen from improved performance in the Spanish, Czech, and Dutch markets. Management has also stated that the rising costs and demand for Chilean cherries, as well as the rising costs and demand for potatoes and onions in North America, are the primary drivers of top-line growth. However, top-line growth was stymied as it made its way down the P&L by a poor harvesting season in Chile for apples and kiwis and in North America for raspberries.
Forward expectations
It is worth noting that the projected EBITDA guidance of $350 million for 2023 does not take into account any input from the Fresh Vegetable segment. This falls slightly below my initial estimate of $400 million. The forecasts take into account the allocation of corporate overhead costs to the Fresh Vegetable segment. In my opinion, there is a path for EBITDA to exceed expectations if the deal is finalized ahead of schedule (associated overheads will be removed, thereby improving EBITDA). Another reason to consider the possibility of an upside surprise is management's outlook for 2023 suggests that they are taking a cautious approach to guidance due to the unpredictable nature of supply, demand, and costs over the past couple of years. Despite this, there are no major worries about the company's performance, except for the expected normalization of commercial cargo performance as freight rates level out. This cautious approach to guidance leaves room for the possibility of an upside surprise. My sense is that management is making efforts to adjust the investors' expectations. However, I have high hopes for the remainder of the year as I was encouraged to learn that European banana prices could increase in 2023 and that North American volume trends appeared to be in good shape.
Model update
Given the worsening outlook (compared to my previous model), my model has been revised to show the near-term fair value vs. long-term potential gains. Using the consensus near-term outlook (through FY25), it is clear that expectations are low, with flattish growth expected in FY23 and FY24, followed by a rebound in FY25. However, I'd like to emphasize that, as consensus suggests, increasing EBITDA margins is critical. My long-term expectations for DOLE remain unchanged: DOLE should grow at GDP-like rates and continue to expand EBITDA margins. At today's share price, the combination of these two should result in an IRR of 11%.
Catalyst
Continuing from the previous section, I believe a possible valuation re-rating upwards could drive the stock higher. When compared to peers such as Mission Produce (AVO), DOLE trades at a 4x discount (6.5x vs 10x), which I believe is due to the high leverage ratio (6x net debt to EBITDA vs AVO at 3.5x). I believe a path to higher upside exists when DOLE begins to generate more cash to pay down its debt, which would result in consensus applying a higher relative multiple.
Conclusion
In conclusion, this post provides an update on DOLE's recent performance, including its 4Q22 earnings report and operating results. While the Fresh Vegetable and DFPEMEA segments underperformed, the Fresh Fruit division showed strength with rising profits. Management's cautious approach to guiding for 2023 leaves room for the possibility of an upside surprise, and my model suggests that DOLE is now fairly valued in the near-term but remains an attractive long-term investment. Based on this analysis, I am recommending a reduction in exposure until valuation gets cheaper (reduce from buy to hold rating) and emphasizing the importance of increasing EBITDA margins. Looking ahead, a possible catalyst for a valuation re-rating upwards exists if DOLE generates more cash to pay down its debt, resulting in a higher relative multiple.
For further details see:
Dole: Fairly Valued In The Near-Term