Market volatility has picked up since the beginning of the year, with all three major indices now sitting at legitimate correction levels. The good news is that this week, all three indices look like they may have started to stabilize, finding support that could provide a new basis for another rally back in the direction of the market’s longer upward trend. Part of the market’s mostly sideways movement this week, however is also being driven by a lot of mixed information on the economic front. This morning, for example new GDP numbers were released for the 4th quarter and full year of 2021. Both numbers came in a very high levels, emphasizing the economy’s resilience last year despite the continued challenges associated with a pandemic that has defied predictions that it would be behind us by this point in time. At the same time, Fed chair Jerome Powell reaffirmed the central bank’s intention to begin raising interest rates as early as March, putting one of the market’s big, bad wolves front and center as the Fed tries to contain inflation while still allowing for conservative growth. Those are just two strong reasons that I think it’s smart to continue to cautious right now.
Maintaining a careful, deliberate and conservative approach to the market also means that paying attention to defensive-oriented industries can be a good way to keep your money working for you even as you try to minimize risk. Utilities and food stocks are two examples of basic needs industries that often work well when you think market risk could be increasing. These are businesses whose models are less sensitive to economic cyclicality, because consumers still need to purchase those products and services even when the economy is forcing us to think more carefully about where we spend our money. These are industries that are less likely to be forced to discount their products to keep generating useful revenue.
Food stocks are an area that I like to focus on, for the simple reason that no matter what the economy is doing, consumers aren’t going to stop providing for their families. Employment difficulties, or a decrease in income may force a family to tighten their belts, but they will still make allowances for food in their monthly budgets. The problem, of course, is that not all stocks are created equal, even when they’re in the same industry. That means that even if an industry is getting positive attention and building bullish momentum in the market, there will still be stocks in that industry that underperform and represent risks to your investment dollars that other stocks in the industry don’t. The challenge for a value investor is that the market is pretty good at pricing a company’s fundamental strength or weakness into its stock, and so a company with poor fundamentals will often be found trading in the lower extremes of its historical ranges. That lower price could make the stock look appealing at first glance for a value investor; but it can also be the classic definition of a value trap – a stock that looks like a great bargain but really isn’t.
Fresh Del Monte Produce (FDP) is an example of a recognizable name in the food industry that is trading at a significant discount compared to its historical levels. From a peak in May 2021 at around $36.50, the stock dropped back to a low at the beginning of December at around $24. More recently, it rallied to a new, temporary peak at around $29 in the middle of this month, but has been dropping back with the broad market’s generally bearish momentum and is now sitting around $27. The company’s fundamental profile is a bit mixed, with some elements that look favorable at first glance but others, found at a deeper level of examination that might suggest there is a reason the stock has underperformed against the market and its industry. Is it a good value, or a value trap? You decide.
Fundamental and Value Profile
Fresh Del Monte Produce Inc. is a holding company. The Company, through its subsidiaries, is engaged in sourcing, transportation and marketing of fresh and fresh-cut produce together with prepared food products in Europe, Africa and the Middle East. Its operations are aggregated into business segments on the basis of its products: bananas, other fresh produce and prepared food. It sources its fresh produced products, such as bananas, pineapples, melons, tomatoes, grapes, apples, pears, peaches, plums, nectarines, cherries, citrus, avocados, blueberries and kiwi from Central and South America, Africa, the Philippines, North America and Europe. It sources its prepared food products from Africa, Europe and the Middle East. It distributes its products in North America, Europe, Asia, the Middle East, Africa and South America. It markets its products under the DEL MONTE brand, as well as under other brands, including UTC, Rosy, Fruit Express, Just Juice, Fruitini and other regional brands. FDP’s current market cap is $1.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined a little more than -97%, while revenues increased by 1.53%. The picture got worse in the last quarter, as earnings declined nearly -99%, and revenues by almost -12%. The company’s margin profile is generally razor thin, and appears to be weakening; over the last twelve months, Net Income was 2.17% of Revenues, but declined to just 0.13% in the last quarter.
Free Cash Flow: FDP’s free cash flow is modest, at a little over $60 million. That translates to a Free Cash Flow Yield of 4.59%. This number also decreased from the quarter prior, at $73.4 million, as well as the $100 million mark in the quarter prior to that. The net decline offers a troubling confirmation of the weakening Net Income picture just described.
Debt to Equity: FDP has a debt/equity ratio of .26. I believe this number, which looks conservative, is also misleading, and the reason is simple. The company has very poor liquidity, with only $19.6 million in cash and liquid assets in the last quarter against almost $479 million in long-term debt. Cash has also declined, from about $26.4 million two quarters ago.
Dividend: FDP pays an annual dividend of $.50 per share, which translates to a yield of about 1.82% at the stock’s current price. It is worth noting that the company’s dividend was around $.30 at the end of 2020, and also that management not only maintained its dividend during the worst of the pandemic, but has raised it twice to bring it to its current level.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $34 per share. That suggests the stock is quite undervalued, with about 25% upside from its current price. It should also be mentioned here that at the end of 2020, this same analysis yielded a fair value target at $39.50 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays FDP’s price action over the past year. The red diagonal line traces the stock’s push higher from about $24 in February of last year to its peak in May at around $36.50; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From the peak, the stock has slid back into a long-term downward trend that appears to have found a bottom in early December at around $24. The stock’s mostly upward push from that point could mark the early stages of a bullish trend reversal, with the recent pivot high at around $29 also acting as immediate resistance for the stock. It has been dropping off of that point, and has yet to confirm a new support level, but if it finds current support anywhere between its current price and $26, that could mark a new, higher low that can signal the very early stages of a trend reversal that would be confirmed with a push above $29. In that case, the stock should have near-term upside to about $31, where previous pivots in July and September are likely to provide additional resistance. A drop below $26, on the other hand would increase the likelihood the stock’s latest rally is a failed reversal attempt, and could see the stock test next support around its 52-week low at $24.
Near-term Keys: FDP’s value proposition looks tempting, given the 25% projected upside to my “Fair Value” price, and what could be the beginnings of a bullish trend reversal in play; but I believe current market momentum is working against the stock, and the underlying fundamental concerns I’ve outlined – declining Free Cash Flow with deteriorating liquidity and high debt are concern enough to keep a disciplined value hunter away. If you prefer to work with short-term trading strategies, a break above $29 could offer a good signal to buy the stock or work with call options, using $31 as a practical near-term profit target. If the stock drops below $26, there could be a useful opportunity to short the stock or buy put options with a target price around $24 per share.