Sunday, March 11, 2018

A current AIM Program Small Cap Equity Holding: Calavo Growers (CVGW) by: Tommy Borin. "Avocados Aren't Toast Yet"

Calavo Growers (CVGW, $84.75): “Avocados Aren’t Toast Yet”

By: Tommy Borin, 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.


Calavo Growers, Inc. (NASDAQ: CVGW) engages in the marketing, and distribution of avocados, and other perishable foods. The company distributes its broad range of fresh and processed food products to supermarkets and restaurants, food distributors, convenience stores, and produce wholesalers. The company mainly produces avocados in California, Mexico, and Chile.

• CVGW is poised for continue long term grow due to the robust demand for fresh avocados and avocado related products

• Renaissance Food Groups continues to accelerate topline growth

• Calavo Foods’ margins continue to recover

• The YTD stock price change for Calavo Growers has been  + .41%

Key points: The demand for fresh avocados and avocado related products has significantly increased over the last few years. Industry demand is projected to remain robust and outstrip supplies. CVGW believes it will be able to fill the new demand. Even if California volume shortages continue, CVGW will be able to meet supply demand due to additional volume from Mexico. As volume increases Calavo is expecting to grow gross profits due to scaling efficiencies, which will offset the reduction in the price of fresh avocados

CVGW acquired Renaissance Food Group (RFG) in 2011. RFG has become an increasingly important business segment for CVGW. RFG saw 26% topline growth from 2016 to 2017, and another 20% growth year projected for 2018. RFG is now supplying meal kits to Kroger; however the program is ramping up slower than anticipated. Renaissance is also expected to benefit from increased operating leverage which should improve their gross margin.

Calavo Food’s margins are continuing to recover. This is due to benefits from price increases and falling avocado prices. Volumes are expected to increase from the anticipated launch of a private label guacamole cup with Wal-Mart. Another factor that will increase volumes is Starbuck’s decision to switch from conventional guacamole from organic, which should provide greater customer value.
What has the stock done lately?

CVGW is up .41% YTD, slightly underperforming the benchmark Russel 2000, which is up 1.04% YTD.  The company reported 4Q 2017 earnings of $.59 per share, beating consensus estimates of $.50 per share.
Past Year Performance: CVGW has increased 65.53% in value of the past year, but the stock still appears to be a strong hold. This increase is due to strong top line growth and the company’s ability to perform throughout the drought and wildfires that plagued California growers in 2017. Demand for avocado, precut fruit, and guacamole is projected to continue to increase, giving CVGW excellent growth opportunities going forward.

My Takeaway

CVGW has seen exceptional growth in the last year. The company’s ability to grow even during such a poor growing season in California shows the strength of management. Market trends continue to favor the company, which will spur them to even greater success. I believe that CVGW is still a strong hold for the AIM Fund.
Source: FactSet