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Calavo Growers Hit By Sprouting Costs
Calavo Growers (Nasdaq:CVGW) reported third fiscal quarter net income down 38% from last year's $2.6 million to $1.6 million, as the cost of avocados escalated during the quarter, wilting margins in both its processed and fresh produce sections. Despite this, Calavo Growers is an interesting play due to its partial ownership of California-based agricultural company Limoneira (OTC:LMNR).
Calavo Growers engages in the preparation of avocados and other produce into fresh and processed products for distribution to food retailers, supermarkets and restaurants.
Higher Costs
In the press release, Lee Cole, Calavo's chairman, president and CEO, blamed the poor earnings report on "a short supply of Mexican-grown avocados that resulted in sharply higher costs for fruit sourced from that region". The company reported net income of 10 cents per diluted share, on $96.9 million in revenues in the quarter. Gross margins fell by 151 basis points to 7.9% from 9.5% in the same quarter last year. Cole said that the trend in higher prices for Mexican Avocados was starting to reverse, adding, "We are encountering a more favorable pricing environment and increasingly ample fruit supply across the border." (Read about evaluating financial reports in Advanced Financial Statement Analysis.)
The issue also hurt second-quarter earnings, but to a much more limited extent. The company said that revenue had advanced on a sequential basis for the past 12 consecutive quarters and gross margins remained solid despite higher costs.
Prices are volatile for Avocados due to weather, pest infestations and other external events. Prices have ranged from $1.083 per pound in the 2002/2003 seasons to a recent low of 56 cents per pound. The price for Haas avocados, a common type, was 98 cents in June 2008. The issue of the importation of Mexican Avocados is a very contentious one, and for years it was prohibited. In early 2007, that ban was finally lifted.
Sum of the Parts Play
There is a possible sum of the parts play with Calavo Growers. In June 2005, the company entered into a stock purchase agreement with the Limoneira Company, in which Calavo Growers purchased 15.1%, or 172,857 shares of the outstanding stock of the company. And Limoneira also purchased approximately seven percent interest in Calavo, and the two companies entered into a joint marketing and growing agreement. Most generally defined as a sum-of-parts value, breakup value tells us how much a company would be worth to shareholders if it were stripped down and sold. (Learn more in Use Breakup Value To Find Undervalued Companies.)
Limoneira is a major landowner and agricultural company in California, with approximately 7,000 acres of land. The land is used to grow fresh produce and for real estate development when it is commercially viable. Only 20% of its common stock is publicly traded.
The market capitalization of Calavo Growers is $166 million, and the value of the Limoneira shares, which has a market capitalization of $283 million, is approximately $44 million. If you subtract this $44 million, the market is only valuing the rest of Calavo at $122 million.
Capital Southwest Corporation (Nasdaq:CSWC) is another company that owns large stakes in other publicly traded companies. As of March 31, 2008 two of Capital Southwest's investments included 9.3 million restricted shares of Heelys (Nasdaq:HLYS) common stock and 7.9 million restricted shares of Palm Harbor Homes' (Nasdaq:PHHM) common stock.
Bottom Line
Calavo Growers third quarter results were a bit disappointing, but management indicated that the trend of prices is down which will help margins, and the large stake in Limoneira is another added benefit.
Calavo Growers engages in the preparation of avocados and other produce into fresh and processed products for distribution to food retailers, supermarkets and restaurants.
Higher Costs
In the press release, Lee Cole, Calavo's chairman, president and CEO, blamed the poor earnings report on "a short supply of Mexican-grown avocados that resulted in sharply higher costs for fruit sourced from that region". The company reported net income of 10 cents per diluted share, on $96.9 million in revenues in the quarter. Gross margins fell by 151 basis points to 7.9% from 9.5% in the same quarter last year. Cole said that the trend in higher prices for Mexican Avocados was starting to reverse, adding, "We are encountering a more favorable pricing environment and increasingly ample fruit supply across the border." (Read about evaluating financial reports in Advanced Financial Statement Analysis.)
The issue also hurt second-quarter earnings, but to a much more limited extent. The company said that revenue had advanced on a sequential basis for the past 12 consecutive quarters and gross margins remained solid despite higher costs.
Sum of the Parts Play
There is a possible sum of the parts play with Calavo Growers. In June 2005, the company entered into a stock purchase agreement with the Limoneira Company, in which Calavo Growers purchased 15.1%, or 172,857 shares of the outstanding stock of the company. And Limoneira also purchased approximately seven percent interest in Calavo, and the two companies entered into a joint marketing and growing agreement. Most generally defined as a sum-of-parts value, breakup value tells us how much a company would be worth to shareholders if it were stripped down and sold. (Learn more in Use Breakup Value To Find Undervalued Companies.)
Limoneira is a major landowner and agricultural company in California, with approximately 7,000 acres of land. The land is used to grow fresh produce and for real estate development when it is commercially viable. Only 20% of its common stock is publicly traded.
The market capitalization of Calavo Growers is $166 million, and the value of the Limoneira shares, which has a market capitalization of $283 million, is approximately $44 million. If you subtract this $44 million, the market is only valuing the rest of Calavo at $122 million.
Capital Southwest Corporation (Nasdaq:CSWC) is another company that owns large stakes in other publicly traded companies. As of March 31, 2008 two of Capital Southwest's investments included 9.3 million restricted shares of Heelys (Nasdaq:HLYS) common stock and 7.9 million restricted shares of Palm Harbor Homes' (Nasdaq:PHHM) common stock.
Bottom Line
Calavo Growers third quarter results were a bit disappointing, but management indicated that the trend of prices is down which will help margins, and the large stake in Limoneira is another added benefit.
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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