Tuesday, February 7, 2017

A current AIM Fund holding: Calavo Growers (CVGW) by Pat Wade. "Make Avocados Great Again"


Calavo Growers, Inc (CVGW, $55.40): “Growing Profits, but Trump Polices Create Uncertainty”
By: Patrick Wade, AIM Student at Marquette University




Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Calavo Growers, Inc. (NASDAQ:CVGW) is a company that engages in the distribution, preparation, and marketing of avocados and other perishable food. Calavo Growers was originally pitched by Mark Lakowske, an AIM and Marquette University alumni. Since it’s been added to the portfolio, it’s appreciated 22.56%, which is a contributing factor to the success of the AIM Equity Fund. Lakowske reported on Calavo Growers back in February of 2016, but since then a lot has happened.  

• Calavo Growers and Renaissance Food Group showcased new items at United Fresh including    the Intense Tomatoes Brand.

• Calavo Growers acquired a new production facility located in California.

• Trump’s renegotiation of NAFFTA will create uncertainty with Calavo’s avocado production.

Key points: Calavo Growers, Inc. and Renaissance Food Group, a business segment of Calavo, announced a joint effort at the United Fresh show where the two companies presented new products. These new products included items such as Intense Tomatoes, Avocado Chocolate Mousse, and Red Onion Roasted Garlic Hummus. What makes these tomatoes so intense you ask? These Intense Tomatoes are a proprietary tomato that retains its color and juice after it’s cut, which makes it superior for cooking, dips, and sandwiches. CEO, Lee E. Cole, said, “As Calavo Growers continues to evolve and grow in a highly competitive, fast-moving market, we are proud to showcase our vast product offerings to the industry.”   

On November 3, 2016 Calavo Growers announced that it purchased a production facility that’s located in Riverside, CA. Renaissance Food Group, which distributes high quality fresh food, is expected to benefit from this addition due to its growing customer base in the southwestern portion of the United States. The facility covers a total of 128,000 square feet on approximately 11 acres. Calavo describes the facility as “turnkey” as its state of the art facilities will allow for optimal start up, safety measures, and quality production flow. It’s situated well in regards to transportation by having excellent interstate and rail access.   

Although Calavo seems to be expanding in terms of its product lines and production/distribution facilities, it’s currently facing one possible challenge: the President of the United States. President Trump has stated on multiple occasions that he intends to build a wall between the U.S. and Mexico and “make Mexico pay for it”. The wall will cost somewhere between $15-20 billion, so obviously Mexico has declined to pay for it. Instead Trump proposed a 20% tax on goods imported from Mexico. Essentially, driving the price of avocados higher, which could be detrimental to Calavo’s revenues.   

What has the stock done lately?
Since President Trump won the election, Calavo’s stock has declined from a high of $66.35 on November 16th to where it currently sits at $55.40. With this depreciation in the past two months, Calavo needs to hear that President Trump won’t impose the 20% tax, but will instead find another way to fund his wall.

Past Year Performance: In the past year the price has been hovering a little above $50 and has seen capital gains of 10%. Currently, six analysts cover this stock with an average price target of $75.17 which represents an upside of 36%. It’s seen healthy growth in the past year, and I expect it to continue in the future.  

Source: FactSet

My Takeaway
President Trump’s election has obviously caused Calavo Growers to depreciate, but I think the 20% tax is nothing more than a negotiation tactic – after all, he is a business man. Putting politics aside, I believe Calavo’s addition of a diverse product line with serve them well in the future and position themselves to be less reliant on avocados. 

Additionally, their acquisition of the production facility located in California will help expand their Renaissance Food Group segment. Overall, I believe this company still has growth potential, but that will only be realized after President Trump eases up on Mexico.   





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