Poor Margins Go To Chiquita's Core

By Stephen D. Simpson, CFA | May 10, 2012 AAA

Investing in companies that produce agricultural products is almost always dicey; few of these companies can control either end-market pricing or input costs. Not surprisingly, companies like Dole (NYSE:DOLE), Fresh Del Monte (NYSE:FDP) and Chiquita (NYSE:CQB) don't score especially high on measures of long-term economic value creation. That said, aggressive investors can often do reasonably well in these stocks by trading the huge swings in sentiment.

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Rotten Margins Spoil First Quarter Results
If there was any good news in Chiquita's first quarter, it was that the company exceeded analyst revenue expectations by a modest amount. That's pretty much it for the good news.

Although better than expected, revenue fell 4% on a 3% decline in banana revenue and a 25% decline in "other" revenue, while salad/healthy snack revenue was flat with last year. This marks the fourth straight quarter of year-on-year revenue declines and the core banana revenue fell, as weak pricing (down mid-to-high single digits across sales geographies) outweighed 3% growth in volume.

Margins are always tenuous at agriculture companies and they certainly were not strong this quarter. Gross margin slid five points (due in part to higher fuel costs) and although SG&A expenses actually fell 10%, it pushed the company to basically breakeven operating income - ultimately leading to a big per-share miss.

SEE: Getting The Real Earnings

Hard to Gain Meaningful Traction
Although Chiquita is the number one banana seller in Europe and has a strong enough brand that it can often charge a premium, the company's overall brand power is very limited. For instance, while the company tried to push through some force majeure charges, it doesn't look like they stuck. For better or worse, Chiquita, Dole and Fresh Del Monte are price-takers, not price-makers.

This has been especially true in the company's salads business, as the company as lost business to private label offerings at stores like Walmart (NYSE:WMT). The company is doing what it can to fight back. Not only is Chiquita expanding its portfolio, it's also looking to compete in the private label sector - a move that doesn't sound great for margins, but should create more volume leverage.

Similarly, the move to offer more salads and healthy snacks through quick service restaurant channels like Jack in the Box (Nasdaq:JACK) and McDonald's (NYSE:MCD) has been, at best, a mixed success for Chiquita and the industry as a whole.

SEE: How To Analyze Restaurant Stocks

Only the Brave Need Apply
There's an awful lot that can go wrong at Chiquita. The company is at the mercy of shoppers' budgets and severe weather, and there's also a growing drumbeat of concern about how these large produce companies source their product and treat their workers. All that said, people like bananas and that's not going to go away.

Chiquita has been a stock that has rewarded purchases made in the worst of times, and with the stock carving out some new lows on a price/book basis, now may be the time to consider it again. These are lousy long-term business with virtually no chance of compelling returns on invested capital, but capital gains all spend the same and Chiquita may well be close to a point of maximum pessimism.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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