With the global population growing at breakneck speed and developing countries becoming steadily richer, those that grow and distribute fresh fruit and veg suddenly seem ripe for the picking.
These sorts of macro trends should play into the hands of companies such as Fyffes Total Produce, Produce Investments, Asian Citrus and New Britain Palm Oil. There are, of course, caveats: the sector is acutely vulnerable to factors beyond its control such as fluctuating fuel prices, unpredictable weather patterns, currency movements and volatile market prices for the goods they sell. Shore Capital analyst Phil Carroll covers a number of agriculture companies and admits they are prone to a certain level of volatility - weather patterns in the UK have been particularly abnormal for the past three years. However, there will be peaks and troughs over the years to smooth out the long-term picture, he says. "Agriculture by its nature tends to be more of a medium- to long-term investment. Many of these companies have been around for decades and proven their worth. The general agriculture argument is coming to the fore, so the prospects are good."
What's more, while the sector is mature, it's still quite fragmented. That means many players, particularly the smaller ones, are growing through acquisition, while the big hitters tend to be consolidating to either bulk-up their core offering or reach new markets. Technological advances also mean many of these companies have extremely high-tech machinery, super-efficient logistics lines, and state-of-the-art warehousing - there are even gadgets to test sugar levels in fruit to ensure it's ripe enough. This creates high barriers to entry because customers - the big retailers - must deliver high-quality produce to demanding shoppers who want supermarkets to stock everything from papaya to kumquats - even 30 years ago that would have been unheard of. We've taken a good look at some of the suppliers, and after discarding the rotten apples, have found some great companies in the sector for you to put into your basket.
Fyffes
Half-year sales from Aim-traded banana, melon and pineapple producer Fyffes were slightly ahead of forecasts, despite a tricky trading environment. Major restructuring has improved profitability, trimmed shipping costs and boosted the core banana business. The group is increasingly cultivating fruit from its own farms and the melon business is gaining market share - sales have doubled since Fyffes acquired it in 2008. Yet, despite rallying 36 per cent so far this year, and 13 per cent since we recommended taking a speculative bite back in April, the shares still trade on less than nine times earnings, a discount to their global peers and below their own five-year historic average. The shares look comparatively cheap on an enterprise value-to-cash profits basis, too. Admittedly, profit growth this year will be muted due to last year's tough comparisons, but with a strong balance sheet and forward dividend yield of way over 3 per cent, the shares are still worth snapping up.
Total Produce
Demerged from Fyffes six years ago, Total Produce grows, sources, packages and distributes more than 200 different fresh fruits, vegetables and flowers to retailers and wholesalers across Europe and North America. Given that the sector is mature and organic growth hovers around the 1 to 2 per cent mark, Total's strategy is to make use of its strong balance sheet, healthy cash generation and a fragmented sector to grow earnings through acquisition. So far, that strategy seems to be working. Total has grown EPS by 5 per cent a year since 2007, but broker Goodbody reckons spending up to €300m (£253m) on acquisitions over the next five years could boost earnings by up to 10 per cent annually, and still keep debt under control. Despite the recent uptick in the share price, a forward PE ratio of less than nine for 2014 is undemanding and there's a well-covered dividend, too.
Produce Investments
Whether Sir Walter Raleigh is responsible for introducing the potato to Britain or not, the tuber now ranks among the most widely-eaten vegetables both here and throughout the western world. And Produce Investments is the UK's only listed potato grower and distributor. It also washes, sorts and packages potatoes for retailers, offering own-branded potatoes and privately labelled varieties. The shares have done well recently, rising 56 per cent year-to-date, and recent full-year results were better than expected, despite extreme wet weather causing the lowest-yielding and poorest-quality UK potato crop since 1976. A strong balance sheet means the company also has the fire-power to make acquisitions, most recently Rowe Farming, all while increasing the dividend - up 50 per cent last year to 5.64p. With EPS tipped to grow 45 per cent next year and 8 per cent in 2015, a forward PE ratio of seven appears modest and the shares look decent value.
Asian Citrus
Chinese orange grower Asian Citrus has suffered an image problem in recent years linked to corporate governance concerns and a string of profit warnings. It recently lost UK representation on the board, while a typhoon last year caused an outbreak of citrus canker disease, hampering output. That said, the latest full-year results were slightly better than feared and the company is expanding into grapefruits, pineapples and bananas, which could be good news given that it diversifies specific crop risk out of the business. True, management hasn't given any details on strategy, which is certain to require significant investment, and it has just halved the dividend, too. A forward PE ratio of six, however, and current market capitalisation which reflects little more than the group's substantial cash pile (net cash of 18p a share), makes the shares a buy.
Del Monte & Chiquita Brands International
US-listed Fresh Del Monte Produce (US: FDP) and Chiquita Brands International (US: CQB) are major players in the sector and also worth looking at. Readers of a certain age will be familiar with 'The Man from Del Monte'. He always "say Yes!" and investors have, too. The share price has doubled since the lows of 2009 and the company, a vertically integrated fruit and vegetable producer that also makes prepared foods, is expanding production and moving into new markets. It wants to become the 'go to' company for food retailers around the world as demand for fresh produce keeps growing.
Chiquita grows and distributes fresh bananas and prepared salads. Its shares have nearly doubled since March, but have been rising gradually ever since June 2012 following a period of decline that began in the early nineties. Last year, Chiquita exited its avocado and North American grape business. It also scrapped a joint venture with Danone as part of a major restructuring and cost-saving plan to focus on its core banana and salads businesses, and to make its farming and logistics operations more sustainable. These efficiency savings are already driving productivity and pushing costs out of the business. What's more, positive earnings surprises are more likely given few analysts actually follow Chiquita.
