2023-09-13 10:17:39 ET
Summary
- Mission Produce, Inc. has experienced volatile earnings due to fluctuations in the avocado industry and pricing reset.
- It reported weaker earnings amidst pricing normalization and challenges in its farming segment.
- Despite a reasonable valuation, there are significant downside risks in the near term and we await a tangible improvement in operating performance. Initiate at Neutral.
Investment Thesis
Mission Produce, Inc. ( AVO ) had witnessed volatile earnings as a result of significant volatility in avocado industry as well as pricing reset and moderating inflation. It reported a weaker set of earnings and has underwhelmed expectations for the most part in the last 2 years. While we believe the valuation appears reasonable post the 4x decline in P/E in the last 1 month, there are significant downside risks in the near term and we await any tangible improvement in its operating performance. Initiate at Neutral.
Company Overview
AVO is a leading player in avocado industry focused on farming, marketing and distribution of avocados across retailers and wholesale producers globally. It sources avocados from California, Mexico and Peru and also has total of 12,000 acreage in Peru, Guatemala and Colombia where it does its own farming operations. In addition, it also cultivates blueberry through its plants in Peru.
Weaker Earnings
AVO reported a weaker set of fiscal Q3 earnings , with revenues declining 17% YoY driven by a reset in the avocado prices from elevated levels last year. Average price per unit of Avocado declined by 33% YoY while volumes grew 23% as a result of normalizing industry volumes due to improved supply from Mexico. Gross profit declined 270 bps primarily within its international farm segment on the back of lower pricing from its company owned farms. SG&A expenses remained flattish as lower revenues were largely offset by lower employee benefits, professional fees and reengineering costs. Adj. EBITDA came in below estimates at $21 mn vs Bloomberg consensus pegged at $28 mn.
The weakness was largely within its international farming segment, which reported an EBITDA of just $5 mn, the worst quarter in H2 since it began reporting the segment in 2018 (second worst being $12 mn). Peru's weather as a result of El Nino led to volumes plummeting by 41% YoY which along with operating deleverage due to fixed cost structure of farming led to a significant decline in its EBITDA. Core Marketing and Distribution segment were buoyed by 23% volume growth which led to a 4% EBITDA growth. In all, it reported a non-GAAP EPS of $0.15 below consensus estimates pegged at $0.23 due to weak operating performance.
It ended up with cash and cash equivalents of $23 mn compared to $53 mn at the end of last fiscal year as a result of weak operating performance and drawdown for working capital. Total debt outstanding grew to $167 mn compared to $140 mn in Q4 FY22 to fund the capex investments.
Management guided for flat to slightly lower volumes YoY in Q4 FY23 as a result of poor Peru supply with pricing expected to be 10% higher YoY or flat to slightly higher sequentially. Its production is estimated at 105 - 115 pounds, below its own expectation previously of +10% during H2 2023. We believe International farming segment would be better sequentially as AVO pre-sold Avocados in Q3 prior to the price rise and can capture some improvement in its operating performance, however, we believe it would not be a substantial improvement.
Valuation
AVO trades at 13x FY25 earnings in line with its peers and about 20% discount to its long term average. Post the steep fall of over 25% of its market value in last 1 month, valuation appears attractive optically as the P/E ratio has declined by over 4x in the same time period.
However, we believe there are inherent risks to the near-term outlook amidst continued weakness in avocado pricing as it continues to normalize from last year elevated levels, moderating food inflation as well as challenges in international farming operations. While we are constructive on the business to drive normalized mid single digit volume growth and shift towards high margin company produced avocados, the near term challenges pose significant risks to drive any meaningful upside. Initiate at Neutral.
Risks to Rating
Risks to rating include
1) Given its exposure to farming operations, harvest is inherently linked to weather and any adverse weather conditions can hamper produce as witnessed recently with El Nino effects in Peru leading to substantial reduction in volumes
2) Moderating food inflation may continue to put pressure on pricing and further squeeze the sales and gross margins
3) Upside risks include improvements in gross profit per pound within its marketing and distribution segment as it capitalizes on its large supply chain network and has better pricing power relatively compared to peers
Conclusion
Mission Produce, Inc. has witnessed significant earnings volatility, firstly due to significant volatility in the Avocado industry within volume and price, secondly due to moderating inflation along with challenges in its farming segment. It has missed EPS estimates in 7 out of last 8 quarters as a result of the continued challenges, which has sent the shares sinking over 45% in last year. We believe the current Mission Produce, Inc. valuation appears reasonable, however, there are significant near-term risks and we await to see any tangible progress on operational performance. Initiate at Hold
For further details see:
Mission Produce: Await Operational Improvements To Warrant Any Re-Rating, Hold