Rating Update: Stock Rating C-High Neutral (2/26/24)-Fresh Del Monte Produce Inc. (FDP).

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BUSINESS

Fresh Del Monte Produce Inc., through its subsidiaries, produces, markets, and distributes fresh and fresh-cut fruits and vegetables in North America, Europe, the Middle East, Africa, Asia, and internationally. It operates through three segments: Fresh and Value-Added Products, Banana, and Other Products and Services. It offers pineapples, fresh-cut fruit, fresh-cut vegetables, melons, and vegetables; non-tropical fruits, such as grapes, apples, citrus, blueberries, strawberries, pears, peaches, plums, nectarines, cherries, and kiwis; other fruit and vegetables, and avocados; and prepared fruit and vegetables, juices, other beverages, and meals and snacks. The company also engages in the sale of poultry and meat products; and third-party freight services business. In addition, it manufactures and sells plastic and box products, such as bins, trays, bags, and boxes.
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INVESTMENT RATING

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With future capital returns forecasted to exceed the cost of capital, FDP is expected to be a modest Value Builder.

Fresh Del Monte Produce has a current Value Trend Rating of C (High Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing contradictory signals. Fresh Del Monte Produce has a good Appreciation Score of 84 but a slightly negative Power Rating of 38, leading to the High Neutral Value Trend Rating.

Fresh Del Monte Produce’s stock is selling well below targeted value. The current stock price of $23.18 compares to targeted value 12 months forward of $70.
Fresh Del Monte Produce’s high appreciation potential results in an appreciation score of 84 (only 16% of the universe has greater appreciation potential.)
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Fresh Del Monte Produce has a Power Rating of 38. (This slightly negative Power Rating indicates that FDP’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: the Agriculture Production – Crops comparison group is in a slightly weakened position currently; and recent price action has been neutral. An offsetting factor is earnings estimate behavior for FDP has been slightly favorable recently.

INVESTMENT PROFILE

FDP’s financial strength is low. Financial strength rating is 14.
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Relative to the S&P 500 Composite, Fresh Del Monte Produce Inc. has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that FDP is normal risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, low historical growth, and high earnings variability. FDP’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. FDP has unusually low market capitalization.

CURRENT SIGNALS

Fresh Del Monte Produce’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; and rising leverage.

Fresh Del Monte Produce’s current technical position is very weak. The stock price is in a 8.2 month down move. The stock has declined 22.1% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Extremely important negative changes in investment behavior have recently occurred for Fresh Del Monte Produce Inc. (NYSE: FDP): negative upside/downside volume developed, and the stock fell on very heavy volume.
Fresh Del Monte Produce Inc. (NYSE: FDP). Slight negative changes in fundamentals have recently occurred: significant quarterly earnings deceleration occurred.
In light of this new information we are reviewing our current Overall Rating of C. This review will be completed in the next several days.
Fresh Del Monte Produce Inc. (NYSE: FDP) has reported a loss for its fourth fiscal quarter (ending December 31) of $-2.22 versus $0.38 for the same period a year ago — a decline of -684%. This result fell short of the consensus estimate of $0.29 by $-2.51. For the latest four quarters through December 31, E.P.S. were $-0.24 versus $2.06 for the same period a year ago — a decline of -112%.
Fresh Del Monte Produce Inc. (NYSE: FDP) stock declined by -3.1% on 2/26/24. The shares closed at $23.18. Moreover, exceptionally high trading volume at 204% of normal accompanied the decline. The stock has performed in line with the market over the last nine months and has declined -4.1% during the last week.

CASH FLOW

In 2022, Fresh Del Monte Produce generated a slight increase in cash of +$1.1 million (+7%). Sources of cash were slightly larger than uses. Cash generated from 2022 EBITDA totaled +$245.9 million. Non-operating uses consumed -$9.8 million (-4% of EBITDA). Cash taxes consumed -$18.1 million (-7% of EBITDA). Re-investment in the business amounted to -$231.1 million (-94% of EBITDA). On a net basis, debt investors supplied +$10.4 million (+4% of EBITDA) while equity investors contributed +$3.8 million (+2% of EBITDA).
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FDP’s Non-operating Income, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Fresh Del Monte Produce Peer Group. In most years, Fresh Del Monte Produce was in the second quartile and top quartile. Currently, Fresh Del Monte Produce is at the upper quartile at -4% of EBITDA (-$9.8 million).

FDP’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Fresh Del Monte Produce Peer Group. In most years, Fresh Del Monte Produce was in the top quartile and second quartile. Currently, Fresh Del Monte Produce is above median at -7% of EBITDA (-$18.1 million).

FDP’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Fresh Del Monte Produce Peer Group. (Since 2020 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Fresh Del Monte Produce was in the third quartile and second quartile. Currently, Fresh Del Monte Produce is lower quartile at -94% of EBITDA (-$231.1 million).

FDP’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Fresh Del Monte Produce Peer Group. (Since 2020 Debt Investors, %EBITDA has experienced a very sharp recovery.) In most years, Fresh Del Monte Produce was in the second quartile and top quartile. Currently, Fresh Del Monte Produce is above median at +4% of EBITDA (+$10.4 million).

FDP’s Equity Investors, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Fresh Del Monte Produce Peer Group. (Since 2020 Equity Investors, %EBITDA has sharply accelerated.) In most years, Fresh Del Monte Produce was in the second quartile and lower quartile. Currently, Fresh Del Monte Produce is at median at +2% of EBITDA (+$3.8 million).

FDP’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Fresh Del Monte Produce Peer Group as well. (Since 2020 Change in Cash, %EBITDA has experienced very sharp improvement.) In most years, Fresh Del Monte Produce was in the third quartile and lower quartile. Currently, Fresh Del Monte Produce is below median at +0% of EBITDA (+$1.1 million).
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FDP’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Fresh Del Monte Produce Peer Group as well. In most years, Fresh Del Monte Produce was in the lower quartile. Currently, Fresh Del Monte Produce is lower quartile at +0%.

PROFITABILITY

FDP’s return on equity has been stable since 2014. The current level of 5.6% is 1.53X the low for the period and is -31.4% from the high.
The key to the story for FDP is a very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors.
The productivity of FDP’s assets declined over the full period 2013-2023: asset turnover has experienced a minor downtrend.
Reinforcing this trend, pretax margin experienced a strong overall downtrend but it experienced a very sharp recovery after the 2020 low.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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FDP’s return on equity is slightly below median (5.6%) for the four quarters ended September, 2023.
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Operating performance (pretax return on assets) is above median (4.6%) reflecting asset turnover that is at median (1.30X) and above median pretax margin (3.6%).
Tax “keep” rate (income tax management) is below median (73.0%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is at the lower quartile (1.65X).

GROWTH RATES

Overall, Fresh Del Monte Produce’s growth rate has slowed considerably in recent years.
Fresh Del Monte Produce’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 3.3% per year.

Total asset growth has been 5.3% per year. (More recently it has been 1.0%.)

Annual E.P.S. growth has been -3.0% per year. (More recently it has been 28.3%.)

Equity growth has been 3.0% per year.
No consensus growth rate forecast is available for Fresh Del Monte Produce.
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Relative to the Fresh Del Monte Produce Peer Group, Fresh Del Monte Produce’s historical growth measures are generally third quartile. Revenue growth (3.3%) has been at median. E.P.S. growth (-3.0%) has been below median. Equity growth (3.0%) has been slightly below median. Total asset growth (5.3%) has been at the lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Fresh Del Monte Produce’s stock price performance has been significantly below market. Between April, 2013 and February, 2024, Fresh Del Monte Produce’s stock price fell -9%; relative to the market, this was a -71% loss. Significant price move during the period: 1) November, 2016 – May, 2019: -60%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -11.5% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of -11.5% is lower quartile relative to Fresh Del Monte Produce Inc. Peer Group.

Current 5-year total return performance of -3.5% is lower quartile relative to the S&P 500 Composite.
Through January, 2024, with lower quartile current 5-year total return of -3.5% relative to S&P 500 Composite, Fresh Del Monte Produce’s total return performance is lower quartile relative to Fresh Del Monte Produce Inc. Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, FDP’s overall valuation is exceptionally low. All five factors are lower quartile. The highest factor is the ratio of enterprise value/earnings before interest and taxes, followed by the price/earnings ratio, then by the ratio of enterprise value/assets, then by the price/equity ratio. The lowest factor is the ratio of enterprise value/revenue.

Relative to Fresh Del Monte Produce Peer Group, FDP’s overall valuation is exceptionally low. All five factors are lower quartile. The highest factor is the ratio of enterprise value/revenue, followed by the ratio of enterprise value/assets, then by the price/equity ratio, then by the ratio of enterprise value/earnings before interest and taxes. The lowest factor is the price/earnings ratio.
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Fresh Del Monte Produce has a major value gap compared to the median. For FDP to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.39X to 0.65X. If FDP’s ratio of enterprise value/revenue were to rise to 0.65X, its stock price would be higher by $23 to $47.
For FDP to achieve upper quartile valuation relative to the Fresh Del Monte Produce Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.39X to 1.30X. If FDP’s ratio of enterprise value/revenue were to rise to 1.30X, its stock price would increase by $82 from the current level of $23.

VALUE TARGETS

With future capital returns forecasted to exceed the cost of capital, FDP is expected to be a modest Value Builder.
Fresh Del Monte Produce’s current Price Target of $69 represents a +199% change from the current price of $23.18.
This high appreciation potential results in an appreciation score of 84 (only 16% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 84, the moderately low Power Rating of 38 results in an Value Trend Rating of C.
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Fresh Del Monte Produce’s current Price Target is $69 (+21% from the 2022 Target of $57 and +199% from the 02/26/24 price of $23.18). This rise in the Target is the result of a +1% increase in the equity base and a +20% increase in the price/equity multiple. The forecasted increase in cost of equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a slight negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
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PTR’s return on equity forecast is 5.9% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2014 and 2022. The current forecast is below the 2016 peak of 10%.

PTR’s growth forecast is 4.0% — slightly below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2014 and 2022. The current forecast is steady at the 2021 low of 3%.

PTR’s cost of equity forecast is 4.3% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2014 and 2022. The current forecast is steady at the 2016 peak of 6.0%.
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At Fresh Del Monte Produce’s current price of $23.18, investors are placing a negative value of $-19 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 7.0% per year, and a return on equity of 4.2% versus a cost of equity of 3.5%.
PTR’s 2024 Price Target of $69 is based on these forecasts and reflects an estimated value of existing assets of $40 and a value of future investments of $29.

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