Investors can gain investment ideas from common places such as the produce aisle at your local grocery store. Banana, pineapple, and produce distributors Chiquita Brands and Fresh Del Monte along with nut and snack seller Diamond Foods may represent good places to invest. However, legendary investor Peter Lynch once said, "Investing without research is like playing stud poker and never looking at the cards." These three companies bring that quote into perspective and here's why.
Bananas and more
While Chiquita Brands also sells salads and other deciduous products, bananas still represent 64% of overall 2013 revenue and stand as its only segment to turn an operating profit during that time, according to its latest earnings release. However, its salads and healthy snacks showed the most growth in 2013 increasing 1.5%. Still this segment didn't move the needle on the top line. Overall revenue declined less than 1% last year while free cash flow swung from a negative $21 million in 2012 to a positive $42 million in 2013. Lower banana revenue combined with Chiquita Brands' exit out of the North American Deciduous fruit business served as the main catalyst for decline in overall 2013 revenue. Timing of receivables and lower capital expenditures contributed to the increase in free cash flow. Chiquita Brands' balance sheet leaves much room for improvement. While cash comes in at a respectable 14% of stockholder's equity, Chiquita Brands' long-term debt to equity ratio comes in at a stratospheric 168%. Its operating income doesn't even cover interest expense. Chiquita Brands currently pays no dividend.
Bananas also represents 49% of Fresh Del Monte's sales. Fresh Del Monte fared better than Chiquita Brands with overall sales increasing 8% for 2013 with increased Banana volume serving as the main catalyst. However, increased expenses made a huge dent in Fresh Del Monte's gross profit and troubles in Europe resulted in an impairment of goodwill and other intangible assets putting a non-cash dent in net profitability causing an operating loss of $28 million. On Fresh Del Monte's balance sheet cash equates to a minuscule 2% of stockholder's equity. It's long-term debt to equity only clocks in at 14% of stockholder's equity and when factoring out the goodwill impairment operating income covers interest expense by more than 38 times . An increase in capital expenditures resulted in negative free cash flow for Fresh Del Monte in 2013. In 2012, a more normal year for Fresh Del Monte, it paid out 23% of its free cash flow in dividends. Currently the company pays its shareholders $0.50 per share per year and yields 1.8% annually.
A nutty company
Diamond Foods saw its year to date sales decline 5% versus the same time last year. Diamond Foods saw its year to date nut sales decline 14%. Lower walnut supplies and its strategic reduction of stock keeping units, or SKUs, served as catalysts for the decline. Diamond Foods' snack food segment increased its year to date sales 6%. Overall Diamond Food's shows a decline of 5% in its year to date revenue. Calculations indicate a decline in free cash flow of 2% so far in 2014 due to an increase in capital expenditures. Diamond Foods balance sheet reveals cash and long-term debt to equity coming in at 3% and 418% respectively. Currently the company doesn't and shouldn't pay a dividend.
Things to look for
Recently, Chiquita Brands announced a merger with Irish firm Fyffes that will make it the world's largest banana company and provide the company with scale and efficiency to facilitate cost savings and increased profitability. Fresh Del Monte laid out a plan to grow existing products, innovating new ones, expand its global footprint, seek new distribution channels, and of course cut costs. Diamond Foods expects "headwinds associated with tree nut commodity costs" to continue; however, it also expects an expansion in year over year adjusted earnings before interest taxes depreciation and amortization or EBITDA. Finally, these companies operate in a mature, highly commoditized industry and investors should heed caution and may be better served to look elsewhere for now.
