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.
Summary
•
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
