Calavo Growers revisited: Still ripe for the picking
Editor’s note: This week we’re revisiting some of the companies that were profiled in this space earlier this year. This update is based on a May 9 article by Jennifer Allen, “Calavo Growers Inc.: The color of money.” Since the article ran, Calavo has given investors a hefty return of 51% and analysts believe the small cap will see even more growth in 2008.
The Superbowl is around the corner and everyone’s party supply list will most likely include guacamole, which is good news for Calavo Growers Inc. (Nasdaq: CVGW), a packer and distributor of fresh and processed avocados. The company also markets and sells tomatoes, mushrooms and pineapples. If you had initiated a position in the company when we first profiled it on May 9, you would have seen a hefty return of 51%.
While some of the growth looks as though it has rotted in its most recent quarter, peel off the skin and you’ll find things are still pretty ripe and the small cap’s strategic moves will pay off in the long run.
When SmallCapInvestor.com first put Calavo on the radar screen, the sourcer of avocados from mainly Mexico and Chile was racking in the green with record top and bottom-line results. For the first fiscal quarter ended Jan. 31, the company had posted record net income, rocketing 300% to $1.3 million, or $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.
The small cap was capitalizing on America’s new obsession with health foods, entering a stock repurchase agreement with California land owner Limoneria Co. (Pink Sheets: LMNR), reducing its exposure to California weather risk by becoming a major importer and exporter of avocados and becoming the largest packer of Mexican-grown avocados.
And guess what? It’s still doing all that — and more.
While the company’s most recent quarter was not nearly as impressive as its first quarter, the company’s efforts to reduce its weather risk certainly seem to have paid off, as downside from the Golden state’s weather was mitigated in its most recent quarter by its Mexican operations.
Net sales for the third quarter ended July 31 rose 15.7% to $91 million from $78.9 million in the third quarter of 2006; however, net income skidded 24% in the third quarter to $2.22 million, or $0.15 per share, from $2.93 million or $0.20 per share in the third quarter last year.
“Calavo’s business does have a degree of quarter-to-quarter financial volatility,” Craig-Hallum Capital analyst Michael Lippold wrote in a research note. The analyst has a “buy” rating on the stock with a target price of $23. “Over the short term, revenue and margins are dependent on the size of crop, timing of harvests, price of fruit, location of fruit and short-term supply and demand. With that said, we stress investors continue to focus on the long term.”
Calavo saw fresh product sales increase during the third quarter primarily due to increased sales from avocado exports from Mexico. Mexican fruit volume sold zoomed 339.6% in the quarter. However that was partially offset by a decrease in sales from California sourced avocados due to a smaller California avocado crop for the 2006 and 2007 season.
Additionally, a freeze in Chile — the severity of which had not been seen since 1978 — hurt the company’s processed segment gross margins for the quarter. According to Lippold, the freeze increased the cost of goods for the processed division by at least $1 million during July.
“Even considering the tough circumstances mother-nature has given the company, [it] should finish the year with revenue up 10% and EPS up more than 20%,” wrote Lippold. “We believe 2008 will be an even more significant year for the company. New non-avocado revenue (such as tomatoes) will start to make a larger impact.”
Indeed, the company has taken strategic action to secure a profitable future.
Calavo recently decided to take further steps to diversify its revenue stream by adding complementary new products to its fresh produce offerings. This month the company reported it made an agreement with Farmers’ Fresh Mushroom Inc. of Vancouver, British Columbia to market and distribute their produce under the Calavo brand.
The company said it anticipates shipping approximately 7.5 million pounds of mushrooms in its fiscal year ending Oct. 31, 2008, which should translate into a revenue contribution of approximately $7 million to $8 million for the fiscal year.
“The expansion into mushrooms and pineapples fits with part of our original thesis,” wrote Lippold. “The investments the company has made in building the brand name, infrastructure and customer relationships allows for a smooth transition into other fruits.”
Aside from entering the mushroom space, the company has added fresh Maui Gold pineapples to its product portfolio and has begun marketing Calavo-brand tomatoes.
And this isn’t the end for diversification of product offerings. The small cap said it plans to continue pursuing future opportunities to expand its fresh product and processed product manufacturing businesses.
For fiscal 2008, Lippold raised his revenue estimate to $346 million from $329 million and his EPS estimate to $0.73 from $0.70. The mean estimate of two analysts polled by Thomson Financial is $0.75.
Lippold is projecting a 2008 EPS growth rate of 49% and a three-year EPS compounded annual growth rate of 45%. “We believe the stock is still in an undiscovered phase and the high-growth rate will act as a catalyst for more investor attention in 2008,” Lippold wrote.
So, investors, gather your chips and take a dip of Calavo (CVGW).
