Calavo Growers Inc: The color of money
Everything’s coming up green for Calavo Growers Inc. (Nasdaq: CVGW). Sales of avocados, the company’s chief product, have never been stronger, and Calavo’s investors have been seeing green for the past year as the stock price has climbed steadily.
Calavo went public in 2001 after 78 years as a California avocado growers’ cooperative. Now it sources avocados from other locales, chiefly Mexico and Chile, and sells into international markets. Calavo in 2005 was the first company to market to China.
By transitioning from a grower cooperative to a public company, Calavo has taken the strategic steps toward becoming an international agribusiness. It has reduced its California weather risk by transforming into a major importer and exporter of avocados, and it’s the largest packer of Mexican grown avocados. It has added breadth to its business by purchasing Maui Fresh International, Inc., in 2003, a multi-product distributor of processed and packaged tropical fruits and chilies.
Calavo also has key demographics behind it: people increasingly want to eat healthy, and they love avocados, both fresh and processed. U.S. consumption more than doubled from 1996 to 2005, to 516,100 tons, as imports—and thus availability—increased.
Guacamole has fast become a favorite. It’s a staple in the diet of many Hispanics, the fastest-growing market in the United States. Guacamole, too, is a boon to Calavo’s margins. Gross profit margins on processed avocados were a heady 29% in fiscal 2006. Fresh products, which represented 86.5% of sales, showed margins of 8%.
But the growing awareness of three other factors has driven shares of the Santa Paula, Calif. company to new highs in recent days, said chairman and CEO Lee Cole in an interview with SmallCapInvestor.com. In a food industry hat-trick:
- Two new separate operations in Mexico are both performing “fantastically,” and Cole said he expects this to continue. One handles fresh avocados and the other is a processor. Calavo is using a high-pressure system on one line in Mexico that allows the company to manufacture avocados into guacamole without freezing the fruit or using preservatives. Calavo thus can deliver fresh packaged guacamole to retail and food service customers. Calavo has ordered a second high-pressure machine that it expects to arrive in the current quarter.
- Calavo also is finding success with its ProRipe VIP avocado-ripening program. This system lets Calavo deliver avocados to customers based on their needs. For example, Safeway may want avocados that are ripe in two days; the VIP system allows Calavo to meet those specifications. “That’s another big plus for us,” said Cole. “We’re the only one who has it.”
- Calavo in 2005 entered into a stock purchase agreement with Limoneira Company (Pink Sheets: LMNR). Limoneira's holdings include 7,000 California agricultural acres that offer promising commercial and housing development opportunities. Calavo rents its headquarters from Limoneira, which is located about 100 miles north of Los Angeles in Ventura Country. Thinly traded Limoneira has also set highs in recent days.
The agreement calls for Calavo to market Limoneira’s avocado crop while both companies maximize packing efficiencies by consolidating these operations. But the key payoff of the investment in Limoneira, which goes directly to Calavo’s bottom line, is not the fruit but the real estate.
“It’s not just the part that has to do with the avocados,” said Cole. “There are developments that will take place soon…a lot of this area is prime property.”
Development in Santa Paula—as in many California towns—is a contentious
issue, though. Citizens have voted repeatedly in recent years against growth
measures as plans to build are scrutinized.
Calavo reported record fiscal 2007 first quarter results in early March, with revenues, net income and earnings per share each reaching new highs for the quarter ended January 31. Net income was up 300% to $1.3 million, equal to $0.09 per diluted share, from a net loss of $0.05 per share in the year-ago quarter. Quarterly revenues rose 13% to a record $57.3 million; sales were up for both fresh and processed avocados.
Shares set a record high at $14.60 per share May 2—up $4 from the beginning of March. Calavo stock has since eased back to close Monday at $12.61. It’s up well over 20% in the past 52 weeks, compared with 11% for the S and P 500 and 13% for the industry. Calavo’s market capitalization is about $180 million. Its P/E is 24.6 based on 2006 earnings of $0.53 per share; it also pays a 32-cent dividend, putting the yield at 2.46%.
Cole said both net sales and earnings would exceed year-ago levels in 2007; there is no analyst coverage. He said he struggles when trying to see clouds in the company’s outlook: “We’re very bullish on the future.”
The annual report lists hazards such as the inherent risks of agriculture, of doing business internationally, of the competitive environment. But these perils sound a bit bland when up against the good avocado.
Bonus coverage (from the writer’s kitchen):
"52-Week High Guacamole"
Use Hass avocados, and leave them chunky. No food processors allowed!
2-3 avocados, diced
1-2 tablespoons chopped cilantro
2 tablespoons chopped red onion
A handful of fresh, diced tomatoes
1-2 cloves garlic, minced
Salsa to taste, if you like (adjust salsa depending on amount of onion, garlic and tomatoes)
A squirt of lemon or lime juice
Mix it all together and serve with chips, or as a topping for tacos or quesadillas
