Value Play: Fresh Del Monte Produce (NYSE: FDP)

According to the April 2013 issue of Food Technology, one of the top food trends for 2013 is “fresh.” This is good news for a Florida-based company whose name focuses on fresh: Fresh Del Monte (NYSE: FDP), the world leader in fresh produce and fresh-cut fruit (i.e., ready to eat). As the global population continues to grow, there are more mouths to feed for food companies – food demand is a secular macrotrend for many years to come.

The company is not only larger, but also much healthier financially than either Chiquita Brands (CQB) or Dole Foods (DOLE) – its two main competitors. Chiquita lost both its CEO and CFO in 2012 in the face of mounting losses and decided to divest many underperforming businesses. Similarly, Dole Foods recently sold a “major portion” of its global business to Japanese company Itochu (which also took Dole’s CEO as part of the deal) in a massive restructuring aimed at reducing debt and curbing losses.

By significant contrast, Fresh Del Monte has benefitted from the same CEO since 1996, generated consistent profits in nine of the past ten years (2006 the sole exception), continues to grow its businesses worldwide, pays a dividend, and its balance sheet has very little debt:

Source: Bloomberg

Del Monte is a well-known fruit and vegetable brand that has been around since 1892 (120 years). In 1989, the brand was split into two companies when it was spun was spun off from RJR Nabisco as part of the leveraged buyout (LBO) of Nabisco by the takeover firm Kohlberg, Kravis & Roberts (KKR). Del Monte Tropical Fruit (Fresh Del Monte’s original name, which was changed in 1993) was given the fresh fruit and vegetable produce business and Del Monte Foods was given the canned and preserved produce business.

What constitutes “fresh” has always been a sore point of contention between the two spin-offs, but a recent federal court decision finally put the dispute to rest in favor of Fresh Del Monte Produce. Del Monte Foods was ordered to pay Fresh Del Monte Produce $13.15 million and was permanently enjoined from using the Del Monte trademark on any product containing bananas, berries, melons, papayas or pineapples that was intended to be chilled at the point of sale.

Fresh Del Monte is unique in the fresh produce industry for its vertical integration, owning everything in the supply chain including farms, refrigerated shipping vessels, land trucking, packaging plants, global distribution facilities, and fresh-cut processing facilities. Almost half (43%) of its property, plant, and equipment is located in Costa Rica, the most politically-stable country in Central America. Although the company’s business currently focuses on bananas (45% of total sales) and the North American market (53% of sales), it also is known for the following:

• The number-one marketer of fresh pineapples worldwide;
• The third largest marketer of bananas worldwide;
• A leading marketer of fresh-cut fruit in the United States, the United Kingdom, United Arab Emirates and Saudi Arabia;
• A leading re-packer of tomatoes in the United States;
• A leading year-‘round marketer of branded grapes in the United States;
• A leading marketer for canned fruit and pineapple in the European Union (EU) and other European markets and the Middle East.

The company’s big future growth drivers are prepared foods (e.g., packaged salads) and the expanding economies of Middle-East countries. Billionaire Chairman and CEO  Mohammad Abu-Ghazaleh is a Jordanian palestinian with extensive business contacts throughout the Arab world. The company already owns six major facilities in the Middle East (Jordan, Saudi Arabia, United Arab Emirates). In the recent first-quarter conference call on April 30^th, Abu-Chazaleh discussed the Middle-East opportunity:

We are leveraging the Del Monte brand in many areas that we started in the Middle East, be it in juices, fresh prepared meals, and offerings that have made tremendous growth in that market. In addition to that, we started a year back a fresh market process which is like a quick service store but only for healthy snacks and healthy food.

And this is taking off very nicely in Dubai. We believe that over the next few years this is going to make a big difference to our mix of business. We are doing so many projects as we speak that I think will pay off as we go forward, I mean not in a month or two but in a year or two we will see quite a significant difference to our sales mix and margins in the Middle East as we go forward.

First-quarter earnings missed analyst estimates because of weak demand for bananas in Europe, but revenues were higher than expected. The stock fell 9.7% in the two days following the earnings miss, but since early May the stock has come roaring back and touched the intraday high price it reached on the day prior to the earnings report. The quick rebound is partially explained by the company’s announcement of a new three-year share repurchase plan worth $300 million – double the previous $150 million repurchase plan. Earlier this year in February, the company raised its dividend by 25% as a result of “continued strong operating cash flow and solid performance.” I like management’s commitment to returning cash to shareholders in the form of dividend hikes and share buybacks. It is shareholder-friendly and indicative of a company worthy of long-term investment.

Despite these positives, the stock remains cheap with one of the lowest price-to-earnings ratios in the food industry at 10.5 times. An EV-to-EBITDA ratio of 7.6 is also definite value territory, as is the fact that book value per share of $31.92 (i.e., its liquidation value) is higher than the current stock price of $27. Insider ownership is high at 36.3% (page 18), which ensures that management’s financial interest is aligned with average shareholders.

Fresh Del Monte Produce is a buy up to $32; I’m also adding the stock to my Value Portfolio.

Momentum Play: G-III Apparel (Nasdaq: GIII)

The S&P 500 is up 17% so far this year, which is great, but the retail sector is up an even larger 25%:

Source: Bloomberg

The incredible strength of retailers has been a surprise, because many market analysts were worried that the two-percentage-point increase in payroll taxes that went into effect in 2013 would crimp consumer spending. These fears were partially realized in February when Wal-Mart announced that its sales were the worst in seven years.

But the death of the U.S. consumer has been greatly exaggerated. In April, apparel retailers reported a 1.2 percent sales gain – the largest sales gain in more than a year. And indications are showing that this unexpected strength in consumer spending continued into May. According to Bloomberg:

Lower fuel costs combined with rising stock and home values are boosting buying power, which will help underpin purchases as the labor market improves. Resilient sales indicate the effects on spending from a higher payroll tax will prove temporary, corroborating forecasts of a pickup in the economy after a second-quarter soft spot.

“Consumers are staying active and providing support to the economy,” said Michael Moran, chief economist at Daiwa Capital Markets America Inc. in New York, who correctly forecast the increase in sales.

Although retailers have had a nice run, the positive momentum should continue after the Q2 soft spot. Looking at the historical seasonality for retail stocks, the remainder of 2013 looks positive. One promising retail play in the small-cap space is G-III Apparel (Nasdaq: GIII), which designs and manufactures a wide range of apparel, including outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance wear, as well as luggage and women’s handbags, and small leather goods. Apparel products (page 5) are sold under G-III’s own proprietary brands (e.g., G-III, Andrew Marc, Black Rivet, Vilebrequin), as well as licensed brands (e.g., Calvin Klein, Kenneth Cole, Tommy Hilfiger), and private retail labels for JC Penney, Express, and Aeropostale.

As of January 31, 2013, G-III operated 218 retail stores, of which the vast majority (145) constitute the proprietary “Wilsons Leather” brand. Other retail stores include four under the proprietary “Andrew Marc” brand and 63 under the proprietary “Vilebrequin” brand. Six retail stores are operated under the licensed “Calvin Klein Performance” brand, of which two are located in the United States and four are located in China. Retail only accounts for 13.4% of G-III’s sales, so the company is primarily a wholesaler and a licensor. Sales of licensed product accounted for 67.3% of net sales in fiscal 2013, with Calvin Klein the most important. Non-licensed products were only 19.3% of net sales because the company believes that “consumers prefer to buy brands they know.” Almost 30% of total sales come from only two retailers: Macy’s (operator of Macy’s and Bloomingdales) and MarMaxx Group (operator of TJ Maxx and Marshall’s).

The company is headed by Morris Goldfarb, a well-respected apparel executive who is the son of G-III’s founder Aron (a Holocaust survivor) and has worked at G-III for 40 years. One investment manager describes Goldfarb glowingly:

Morris is a uniquely competent, compassionate, visionary executive who is driven to succeed. The respect and affection his colleagues feel for him, which is the mark of a great leader, is profound. They follow him into battle with vigor and pride. He is just as respected by his retail accounts, suppliers and industry peers.

I first met Morris 13 years ago when we went to look at his business (then a $300-million leather coat company; now a $1.5 billion apparel giant), never expecting to invest. But I was so impressed with Morris personally, with his intelligence, integrity and solid sense of what’s right. He’s the type of CEO I’m always willing to bet on: an exceptional leader and an exquisitely fine human being.

The company focused almost exclusively on leather coats from its founding in 1956 until 1992, when it started to branch out into other forms of apparel, including dresses. Its acquisition from PVH of a license to sell Calvin Klein-brand dresses has made G-III the number one or two dress company in the U.S. Still, the leather-coat legacy makes the company very reliant on third-quarter sales (58% of annual sales occur between July and November) as people buy coats in anticipation of cold winter weather. Diversification efforts continue, with the most recent example the August 2012 acquisition of Vilebrequin, a Swiss-based global provider of luxury swimwear and resortwear.

Besides G-III’s stellar management, I like the fact that the company’s products range from low-end bargain items at Marshall’s to high-end luxury brands like Vilebrequin. Although historically virtually all of G-III’s sales have been generated in the U.S., the acquisition of Swiss-based Vilebrequin has the potential to be transformative, opening up G-III’s products to the entire world. Different apparel segments perform better or worse depending on economic conditions and G-III is well-positioned through its diversification efforts to do well regardless of the economy.

G-III’s financial performance has been impressive. Earnings per share have been positive in nine out of the past 10 years (2009 the only exception), and generated a five-year compounded annual growth rate of 21.7% (55.8% over 10 years). Five-year revenue growth has also averaged 22.0%, so G-III is a real expansion story and does not just rely on cost-cutting to boost profits. The company is not overleveraged with a debt-to-equity ratio of only 19.8%. Lastly, insider ownership is substantial at 17.9% of shares outstanding (page 9), including a 15.5% stake owned by CEO Goldfarb. Management’s financial incentives are aligned with the average shareholder.

A future upward catalyst is the company’s share repurchase program, which was instituted in September 2011 and authorizes the buyback of up to 2 million shares (9.1% of shares outstanding). Only 125,000 shares have been repurchased so far, and a new credit agreement puts further buybacks on hold until February 2014, but the stock could experience a nice tailwind from repurchase activity after that date.

Despite the stock’s recent price momentum, valuation remains reasonable at a 14.8 trailing P/E ratio – below the industry average, below the S&P 500, and less than half G-III’s average P/E ratio of the past five years. My favorite valuation multiple is the EV-to-EBITDA ratio and G-III’s 8.2 figure rests comfortably within value territory.

Bottom line: G-III looks very attractive right now — solid historical growth, high profitability, low debt, experienced and honorable management, reasonable valuation, and a recent transformational acquisition (Vilebrequin) that provides risk-reducing diversification and expands the company’s marketing opportunities to the whole world.

G-III Apparel is a buy up to $45; I’m also adding the stock to my Momentum Portfolio.