Going Bananas (CQB, FDP)

By Stephen Brown | April 18, 2007 AAA

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.

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