In one of Warren Buffett's more popular chestnuts, he tells us to invest in what we know and understand. Is any business easier to know and understand than the banana business? You either eat them or you use them for pratfalls, simple enough.

Or, perhaps it's not that simple. On occasion, you can lose a ton of money producing them, a fact to which the two largest publicly owned banana producers -- Chiquita Brands (NYSE:CQB) and Fresh Del Monte (NYSE:FDP) -- can attest.

Consider the former. In its last reported quarter, Chiquita Brands posted a $41.9 million loss, or $0.99 a share, compared with a loss of $19 million, or $0.34 a share on a diluted basis, in the same period a year earlier. For 2006, Chiquita reported a loss of $95.9 million, or $2.28 a share. Compare this with a profit of $131.4 million, or $2.92 per share, in 2005.

Fortunately, there was a sliver of a silver lining surrounding this financial cumulonimbus: revenue increased to $4.5 billion in 2006 compared to $3.9 billion in 2005.

The Cruel Hand of Fate
It might be fair to simply chalk up 2006 to bad luck. It seems that everything that could go wrong did go wrong. For one, Chiquita paid Performance Food Group (Nasdaq:PFGC) $855 million for its Fresh Express salads company, instantly making it the "top banana" in the bagged-salad business with a 40% market share.

But, as luck would have it, a massive E.coli scare overwhelmed the market shortly after the purchase, temporarily devastating bagged-spinach sales, even though Chiquita's spinach was apparently unaffected. The financial hit forced Chiquita to suspend its $0.10 quarterly dividend payment.

Add to this an embarrassing admission that Chiquita paid off Colombian terrorist groups in order to protect the operations of its former Colombian subsidiary, Banadex, which it sold for $43.5 million in June 2004. As part of a plea deal, the company must pay a $25 million fine, subject to sentencing June 1.

Fortunately, there is always tomorrow. And for Chiquita, tomorrow should be brighter than today, especially once the company's bagged-salad business regains its footing. Lower margin banana sales accounted for approximately 50% of Chiquita's consolidated net sales in 2005, down from 55% in 2004, and that percentage is expected to drop further as sales of the higher-margin bagged-salad division grows.

A Not-So-Fresh Alternative
As for Fresh Del Monte, the company is the No. 1 marketer of fresh pineapples and branded melons and the third largest marketer of bananas, with an estimated 14% market share in 2005.

And like its banana-producing counterpart Chiquita, Fresh Del Monte has had a difficult time making money peddling bananas and other produce. The company's chairman and chief executive officer called 2006 "the most challenging year in nearly a decade".

Indeed, the numbers support that assertion. For the fourth quarter of 2006, the Florida-based produce merchant lost $59.9 million, or $1.04 a share, on sales of $737.6 million in the fourth quarter of 2006. For the year, Fresh Del Monte lost $145.1 million, or $2.51 a share, on sales of $3.21 billion.

Like Chiquita, Del Monte was hit by a seemingly perfect storm. The company was forced to charge $148.3 million in asset impairment and restructurings, saw significant increases in procurement and logistics costs caused by fuel increases and was impacted by lower sales volume and selling prices of bananas in Europe.

Doing Well... And Eating Well
But these setbacks are likely temporary. Chiquita and Fresh Del Monte are leaders in the fresh produce market, where the economics are expected to improve on stronger produce demand, declining fuel prices and higher market-clearing profit levels.

On the former, more people -- especially the chubby variety -- are growing cognizant of the health-promoting qualities of fresh fruits and vegetables, which should support demand and pricing. What's more, given quirks in the human psyche, many people believe the simple act of purchasing fruits and vegetables is itself beneficial. (How many times have you had to purge the refrigerator of decaying produce?)

At current levels, Chiquita and Fresh Del Monte are intriguing value plays: Both companies sport very low price-to-sales and price-to-book values, both are trading below their 52-week lows, and both are conservatively financed.

Neither is a moonshot, to be sure. But then again, neither is likely to flame-out either.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Stock Analysis

    What Exactly Does Warren Buffett Own?

    Learn about large changes to Berkshire Hathaway's portfolio. See why Warren Buffett has invested in a commodity company even though he does not usually do so.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center