2023-11-26 22:07:33 ET
Summary
- Mission Produce's revenue has grown underwhelmingly at a CAGR of 2%, but more importantly, its margins have declined substantially since FY19.
- The company benefited from elevated prices and robust demand. This has now changed, and it is struggling. Prices have noticeably declined, with limited scope for a return to prior levels.
- We are not sold on the company as a long-term winner, primarily due to its commoditized nature. It will struggle to differentiate itself.
- When comparing AVO to its peers, the company is significantly underperforming and has no redeeming qualities. When taken in conjunction with debt and negative FCF, shareholders have little hope for value.
- AVO’s valuation does not suggest value in our view, particularly due to the concerns raised. Growth in the Avocado industry is not compelling enough.
Investment thesis
Our current investment thesis is:
- AVO is not an attractive company in our view. The business operates in a commoditized industry, which although is growing, limits the scope for long-term value creation. When considering this in conjunction with execution risks, such as operational improvement and a return to FCF positivity, we see more problems than gains.
- Growth in Avocado demand will not be unwavering, the industry will experience similar issues to the current year, with price and volume volatility. AVO’s supply chain will continue to position it as a leader but this is not sufficient.
Company description
Mission Produce ( AVO ) is a global leader in the production and distribution of avocados. Founded in 1983, the company has established itself as a prominent player in the fresh produce industry, focusing on avocados throughout the supply chain from cultivation to distribution.
Share price
AVO’s share price performance has been disappointing, losing almost 50% of its value in the last year. The company has experienced a decline in financial performance contributing to investors adjusting their future outlook.
Financial analysis
Presented above are AVO's financial results.
Revenue & Commercial Factors
AVO’s revenue growth has been mild, with a CAGR of +2% into the LTM period. The company has performed better on an EBITDA basis with a CAGR of +6%.
Business Model
AVO manages a global supply chain of avocado production (and to a lesser extent, other fruits/vegetables), from cultivation and harvesting to distribution globally through its local centers.
Given the global popularity of avocados, AVO has successfully grown its operations on an international scale. It has utilized this trajectory to grow its operations and expand into new markets, alongside the acquisition of new production sites. Despite the growth story of the segment, the market is saturated in many locations, which acts to limit room for substantial growth.
The following tailwinds are expected to drive growth in the coming years:
- Consumer interest in healthy eating: Avocados are strongly associated with healthy diets, primarily due to their vitamin profile and healthy fats. More than half of consumers are willing to pay a premium for foods that support health.
- Growing Hispanic population: 91% of Hispanic households currently purchase avocados, representing both resilient demand and scope for growth through population.
- Millennial and Gen-Z consumption : 71% of millennial households purchase avocados, comparably the highest among cohorts. This trend has the potential to be “passed down,” contributing to sustained growth in demand.
The company has increasingly vertically integrated its operations, seeking to increase control and improve operational capabilities, with the end goal being margin improvement. This has not been delivered thus far.
Further, agricultural businesses, particularly in the coming years with growing climate change issues, are susceptible to weather conditions and other factors that can affect harvests.
Margins
AVO’s margin development has been volatile. The company made impressive gains during FY19, the year of its IPO, followed by a persistent decline to its current LTM level.
The fresh food industry is highly competitive due to its commoditized nature, however, the growing demand for avocados (and AVO’s leading position) has allowed it to achieve outsized returns. This said, supply chain constraints / operational capabilities alongside price/demand fluctuations have contributed to an uncertain profitability profile.
We expect the company to face continued pressure to generate outsized returns, although should periodically achieve this over an extended period as demand and pricing beneficially coincide.
Quarterly results
AVO’s recent performance has been poor, with top-line revenue growth of 0.4%, (1.4)%, (20.5)%, and (16.5)% in its last four quarters. In conjunction with this, margins have continued to decline, with limited visibility as to if a “bottom” has been reached.
The company’s performance is a reflection of the wider industry’s changing economics. Following a period of elevated prices, partially linked to inflation, ASP has declined considerably. Volume has improved but the new equilibrium is at a lower level, contributing to a decline in unit economics.
Further, AVO was negatively impacted by a sudden decline in volume in the Peruvian region, which when taken in conjunction with fixed overheads, contributed to a decline in margins. Management is seeing prices improve in response to this, although we expect this to contribute to weakness in Q4.
The broader theme here is that with weaker economic conditions, the demand for Avocados across the West, and area of expansion for the industry, could soften given the relative pricing to other vegetables.
Balance sheet & Cash Flows
While the company has experienced a decline in profitability, its debt has begun to increase as AVO has been unable to net deleverage YoY. At its current level, this is not an immediate concern as its interest coverage is 6.3x but remains an issue to improving its FCF.
Speaking of FCF, the company has persistently burned cash since FY21, primarily due to significant capex commitments in order to drive revenue growth. When considered alongside its margins, these are extremely poor unit economics for investors and will limit long-term return.
Outlook
Presented above is Wall Street's consensus view on the coming years.
Analysts are forecasting an improvement in both revenue growth and margins, with a CAGR of 8% and 38% into FY25F, respectively.
Analysts are likely assuming a combination of increased growth through capacity, resulting from its heavy capex investment, alongside greater avocado consumption globally. This appears broadly reasonable in our view, although we would conservatively step this rate down to ~6%.
Margins are less easily quantified in our view. Analysts appear to be assuming an improvement in pricing alongside greater scale benefits. We are less convinced, expecting an EBITDA-m of closer to ~5-6%.
Industry analysis
Presented above is a comparison of AVO's growth and profitability to the average of its industry, as defined by Seeking Alpha (40 companies).
AVO performs poorly relative to its peers, with limited growth and unattractive margins. This is principally attributable to its commoditized nature, as the company lacks the ability to sufficiently differentiate itself, limiting the scope to improve its unit economics. Further, this means AVO’s growth is materially tied to the Avocado industry, which is unlikely to consistently attribute market-leading level
Valuation
AVO is currently trading at 24x LTM EBITDA and 11x NTM EBITDA. This is broadly in line with its historical average on considering both together.
Given the limited historical trading, it is not worth a detailed benchmark to its prior trading. This said, a discount would be reasonable given its decline in margins and near-term headwinds.
Further, AVO is trading at a premium to its peers on an LTM EBITDA basis (~40%) but a discount on a NTM P/E basis (~66%). Given the declining profitability but clear downcycle position, as well as overly bullish analyst estimates, we believe the company’s valuation is likely in between the two metrics. At this level, we do not see the clear discount expected given its long-term unattractiveness.
Key risks with our thesis
The risks to our current thesis are:
- Growing demand for avocados globally.
- Strategic expansion into emerging markets.
- Climate-related risks impacting production.
Final thoughts
We do not consider AVO a compelling value proposition. The business is facing near-term headwinds due to volume concerns, alongside a sustained decline in prices. The business has likely peaked in the medium term and is now facing a period of normalization.
The industry is positioned well to grow but even this comes at a cost. With significant capex requirements, this will not necessarily mean good FCF returns. Further, the company has limited scope for differentiation, so this growth will only track the industry.
For further details see:
Mission Produce: Commoditized Industry With Limited Scope For Outperformance