By:
Charles Muth, 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) markets
and distributes avocados and other perishable foods through their Fresh
Products (49.5% FY16 Revenue), Calavo Foods (7.4%), and Renaissance Food Group
(43.1%) segments. CVGW predominantly operates within the U.S. and customers
include food distributors, produce wholesalers, supermarkets, convenience
stores, and restaurants.
· The
Fresh Products segment prepares avocados for customer delivery, the Calavo
Foods segment purchases, manufactures, and distributes a diverse selection of prepared
products (guacamole), and the Renaissance Food Group (“RFG”) sources, markets,
and distributes health focused, fresh packaged food products.
· Increased
domestic demand for avocados (guacamole products) at double-digit rates and CVGW’s
competitive market position as a leading avocado producer contribute to expected
future growth.
· A
growing, diversified, and year-round supply of avocados support market
expansion and stability.
· CVGW’s
continued company reinvestment and attitude towards accretive acquisitions
highlight management’s growth strategy and indicate strong future performance.
· The
RFG segment is working to build a top-notch operation on quick-turn order
fulfillment and just-in-time retailer distribution. This segment had
double-digit revenue growth and offset declines in the Fresh business during
1Q17.
Key
points:
CVGW has taken advantage
of the 4x increase in domestic avocado consumption since 2000. Throughout 2016,
over 2.3 billion total pounds (5.2 billion avocados) of this “superfood” were
consumed. In addition, 29% of millennials aged 21-34 are willing to pay a
premium for more healthy food options and 47% of individuals aged 18-34 have
adopted a healthier diet from the prior year. Accordingly, the year-round
supply and increased popularity of avocados has spurred innovative recipes and put
avocados in the spotlight as a delicious, healthy food trend.
The volume of avocados
delivered to company packing facilities directly impacts operating performance.
In addition to using Mexican sourcing facilities, CVGW’s strategy focuses on
retaining and recruiting growers who comply with their business model. With an increase
in expected future demand, CVGW plans to expand and diversify sourcing
operations. While solidifying avocado supply by diversifying these sourcing
operations, CVGW also limits inclement weather and sourcing facility risk.
Over the last few years,
CVGW has placed an emphasis on company reinvestment and expansion. Recently,
the Jalisco facility in Mexico was completed. This facility plans to be
authorized for U.S. export in the near future and may be a strong sourcing
connection. In addition, CVGW has expanded RFG production capacity by 260,000
square feet in Florida and Texas. CVGW maintains interest in future
acquisitions, but puts an emphasis on larger companies (>$100M) that are
instantly accretive.
Moving forward, major
operating concerns include inherent farming risks, international exposure, and
the presence of generic brands. First, in addition to being reliant on the
market forces (supply and demand) for products, inclement weather and other
environment concerns can negatively impact operational performance. Second, the
firm sources raw materials from Mexico and are subject to several factors
including organized crime, regulations, and taxes. Lastly, large retail stores
negatively impact firm performance with significantly lower priced products.
What
has the stock done lately?
Since CVGW released 1Q17
results on March 7, 2017, the stock has increased nearly 30% (from $51.20).
Despite missing EPS by $0.10, the stock increase is driven by management’s
double-digit revenue, margin, and EPS guidance. Looking forward, avocado demand
is expected to be strong and the RFG segment will continue to drive earnings.
Following this earnings release, company insiders’ increased stock holdings in
CVGW throughout March and April, further driving investor confidence.
Past
Year Performance:
Throughout the last
six-years, Calavo Growers has posted consecutive, all-time high gains in
revenues, margins, and earnings per share. CVGW’s stock increased 17.6% (from $56.11
on 04/25/16) in value over the past year. Also, FY16 revenue increased 9% YOY,
gross margin increased 26%, and operating income increased 40%.
Specifically,
this gross margin growth highlights increased operational efficiencies coupled
with industry expertise in sourcing, production, and management. CVGW is aware
of the surrounding operating environment and stays consistent with their
strategic objectives, while remaining nimble to adjust with changing market
conditions.
1 Year Stock Chart vs. Benchmark from FactSet here
Source:
FactSet
My
Takeaway
Calavo
Growers operates under a competent management structure that has taken
advantage of the growing avocado market. In addition to posting all-time high
earnings in 2016 and increasing the dividend payout 12.5% to $0.90, CVGW has identified
strong future demand in the avocado market. Accordingly, the firm has worked to
diversify and expand sourcing operations through company reinvestment and
expansion. By taking preemptive action towards locating diversified sourcing locations,
CVGW will be ready to meet customer demand and secure increased market share.
Also, despite missing 1Q17 earnings, CVGW has maintained investor confidence by
effectively disseminating information regarding the missed quarter guidance and
updated year outlook. Based off this analysis, I recommend that CVGW be kept in
the AIM Small Cap Fund at its current weight and be watched throughout 2017
until additional concrete information is given regarding future market demand
of avocado products.
1 Month Stock Chart from FactSet here
Source:
FactSet
