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Equity Bottom-Up

Fresh Del Monte Produce / Equity Bottom-Up

Fresh Del Monte Produce [FDP_US; US$1.41 billion market cap; US$10 million total average daily value traded] reported a marginal dip in revenues while profitability was impacted temporarily for the first quarter ended March 2020. Net income for the first quarter witnessed a drastic but short term decline to $13 million from $36.1 million in the prior year same period. We believe growth in revenues and profitability would be back on track for the company as its products are in the essential staples category, with the current slowdown expected to be transitory. The company continues to strategically focus attention on growing its business profitably. As soon as the uncertainty regarding COVID-19 pandemic subsides, growth in revenues would be immediately back to normal levels which will then help in increasing profitability going forward, in our opinion. The lockdown in some of the geographic locations of the company reduced its product volumes drastically and pricing also increased for some of them due to supply disruptions, while geographies that saw an oversupply of products saw drastic reduction in prices and increase in volumes thereby affecting financial performance. Volume and pricing for most of the products will eventually normalize once demand and supply aligns in most of the geographic locations.
Net sales for the first quarter of 2020 were $1,118 million, compared with $1,154 million in the first quarter of 2019.&nbsp; The decrease in net sales in the first quarter of 2020 was primarily due to lower net sales in all of the company's business segments. The company has estimated that the COVID-19 pandemic impacted net sales during the first quarter of 2020 by approximately $27.0 million, in its fresh and value-added and banana business segments, as compared to the company's expectations for these segments. In addition, the impact of the voluntary product recall at the company's subsidiary, Mann Packing, in the fourth quarter of 2019 continued to impact net sales, in the fresh and value-added business segment, during the quarter as volumes have not returned to pre-recall levels.&nbsp;
COVID-19 Pandemic Impact
The COVID-19 pandemic began to have a material adverse impact on the operations of the company in the quarter ended March 27, 2020, resulting in service cancellations and containers that were unable to clear at certain Chinese ports. As a result, the company had to redirect products to markets such as Japan, Korea, and Hong Kong which had a negative impact on the financial performance due to oversupply in these markets. Additionally, the government imposed mandatory closures and restrictions across various of company’s key global markets, that resulted in volatile supply and demand conditions, primarily of the higher price point products such as pineapples, avocados, and fresh-cut fruit and vegetables, as well as reduced demand in the company’s foodservice distribution channel.&nbsp;
Gross Profit Takes a Hit; Liquidity Measures Initiated
Gross profit for the first quarter decreased by 28% to $68.5 million, compared with $95.1 million in the prior year same period. The decrease in gross profit was principally due to lower gross profit in the company's fresh and value-added and banana business segments, partially offset by higher gross profit in the company's other products and services business segment.&nbsp; Gross profit was also impacted by inventory write-downs of $8.0 million, primarily related to reduced demand in the company's foodservice distribution channel as a result of government imposed mandatory closures and social distancing initiatives associated with the COVID-19 pandemic, along with higher ocean freight and production and procurement costs. The decrease in operating income was the result of lower gross profit, partially offset by an initial insurance recovery related to Mann Packing's voluntary product recall in 2019. The company reported earnings per diluted share of $0.27 in the first quarter of 2020, compared with an earnings per diluted share of $0.74 in the first quarter of 2019. The reported adjusted EPS was $0.34 in the first quarter of 2020, as compared to $0.46 for the first quarter of 2019.&nbsp;
The company expects that volatility in the supply and demand for its products and reduced demand in its foodservice distribution channel will continue to adversely impact its results of operations in the second quarter of 2020. The extent of the impact of the COVID-19 pandemic on the company's financial performance, including the ability to execute on the Company's strategic initiatives, will depend on future developments, including the duration and spread of the pandemic and related government restrictions, all of which are uncertain and cannot be predicted.&nbsp;
Total debt for the company stood at $598.9 million at the end of March 2020 vs. $587.1 million at the end of December 2019.&nbsp;Interest expense, net for the first quarter was $5.3 million, compared with $6.8 million in the first quarter of 2019 due to lower interest rates and lower average loan balances. Subsequent to the quarter ended March 27, 2020, the company has been taking several steps to conserve its liquidity position amidst global uncertainty, which includes temporarily suspending the share repurchase program, reducing interim cash dividend from ten cents ($0.10) per share in the first quarter of 2020 to five cents ($0.05) per share in the second quarter of 2020, and delaying certain of planned capital expenditures to the second half of 2020.&nbsp;
Maintain Estimates and PT; 40% Upside 
The company faced a challenging external environment in the first quarter of 2020 and the revenues were below our expectations with net income being much lower. But a recovery in pricing and volume for most of the products (essential staple products) in the fresh value added products segment and banana segment in the coming quarters should result in normalization of revenue and net income growth for the company in the current year. We continue to maintain our FY2021 earnings estimates at $1.80 per share. Similarly, we also maintain our price target at $42 representing an upside of approximately 40% over the current stock price. On a P/E basis, the stock is trading at a P/E of just 17x on our FY2021 earnings estimate of $1.80 per share. &nbsp;
We believe that the current stock price provides an attractive entry point with limited downside for long-term investors. Management continues to diversify its business both in terms of geography and product line in order to reduce its dependence on a single region or product and minimize the impact of competition, poor weather, seasonality and cost fluctuations. The recent restructuring initiatives along with the acquisition of Mann Packing are beginning to help the company to increase revenues, reduce costs and to further improve the bottom-line in the coming period. We expect the stock price to rally once the external environment stabilizes with the company’s fundamentals beginning to revert to normal levels.&nbsp;
For further details please see our attached Earnings Update Report.

Fresh Del Monte Produce [FDP_US; US$1.41 billion market cap; US$10 million total average daily value traded] reported a marginal dip in revenues while profitability was impacted temporarily for the first quarter ended March 2020. Net income for the first quarter witnessed a drastic but short term decline to $13 million from $36.1 million in the prior year same period. We believe growth in revenues and profitability would be back on track for the company as its products are in the essential staples category, with the current slowdown expected to be transitory. The company continues to strategically focus attention on growing its business profitably. As soon as the uncertainty regarding COVID-19 pandemic subsides, growth in revenues would be immediately back to normal levels which will then help in increasing profitability going forward, in our opinion. The lockdown in some of the geographic locations of the company reduced its product volumes drastically and pricing also increased for some of them due to supply disruptions, while geographies that saw an oversupply of products saw drastic reduction in prices and increase in volumes thereby affecting financial performance. Volume and pricing for most of the products will eventually normalize once demand and supply aligns in most of the geographic locations.
Net sales for the first quarter of 2020 were $1,118 million, compared with $1,154 million in the first quarter of 2019.&nbsp; The decrease in net sales in the first quarter of 2020 was primarily due to lower net sales in all of the company's business segments. The company has estimated that the COVID-19 pandemic impacted net sales during the first quarter of 2020 by approximately $27.0 million, in its fresh and value-added and banana business segments, as compared to the company's expectations for these segments. In addition, the impact of the voluntary product recall at the company's subsidiary, Mann Packing, in the fourth quarter of 2019 continued to impact net sales, in the fresh and value-added business segment, during the quarter as volumes have not returned to pre-recall levels.&nbsp;
COVID-19 Pandemic Impact
The COVID-19 pandemic began to have a material adverse impact on the operations of the company in the quarter ended March 27, 2020, resulting in service cancellations and containers that were unable to clear at certain Chinese ports. As a result, the company had to redirect products to markets such as Japan, Korea, and Hong Kong which had a negative impact on the financial performance due to oversupply in these markets. Additionally, the government imposed mandatory closures and restrictions across various of company’s key global markets, that resulted in volatile supply and demand conditions, primarily of the higher price point products such as pineapples, avocados, and fresh-cut fruit and vegetables, as well as reduced demand in the company’s foodservice distribution channel.&nbsp;
Gross Profit Takes a Hit; Liquidity Measures Initiated
Gross profit for the first quarter decreased by 28% to $68.5 million, compared with $95.1 million in the prior year same period. The decrease in gross profit was principally due to lower gross profit in the company's fresh and value-added and banana business segments, partially offset by higher gross profit in the company's other products and services business segment.&nbsp; Gross profit was also impacted by inventory write-downs of $8.0 million, primarily related to reduced demand in the company's foodservice distribution channel as a result of government imposed mandatory closures and social distancing initiatives associated with the COVID-19 pandemic, along with higher ocean freight and production and procurement costs. The decrease in operating income was the result of lower gross profit, partially offset by an initial insurance recovery related to Mann Packing's voluntary product recall in 2019. The company reported earnings per diluted share of $0.27 in the first quarter of 2020, compared with an earnings per diluted share of $0.74 in the first quarter of 2019. The reported adjusted EPS was $0.34 in the first quarter of 2020, as compared to $0.46 for the first quarter of 2019.&nbsp;
The company expects that volatility in the supply and demand for its products and reduced demand in its foodservice distribution channel will continue to adversely impact its results of operations in the second quarter of 2020. The extent of the impact of the COVID-19 pandemic on the company's financial performance, including the ability to execute on the Company's strategic initiatives, will depend on future developments, including the duration and spread of the pandemic and related government restrictions, all of which are uncertain and cannot be predicted.&nbsp;
Total debt for the company stood at $598.9 million at the end of March 2020 vs. $587.1 million at the end of December 2019.&nbsp;Interest expense, net for the first quarter was $5.3 million, compared with $6.8 million in the first quarter of 2019 due to lower interest rates and lower average loan balances. Subsequent to the quarter ended March 27, 2020, the company has been taking several steps to conserve its liquidity position amidst global uncertainty, which includes temporarily suspending the share repurchase program, reducing interim cash dividend from ten cents ($0.10) per share in the first quarter of 2020 to five cents ($0.05) per share in the second quarter of 2020, and delaying certain of planned capital expenditures to the second half of 2020.&nbsp;
Maintain Estimates and PT; 40% Upside 
The company faced a challenging external environment in the first quarter of 2020 and the revenues were below our expectations with net income being much lower. But a recovery in pricing and volume for most of the products (essential staple products) in the fresh value added products segment and banana segment in the coming quarters should result in normalization of revenue and net income growth for the company in the current year. We continue to maintain our FY2021 earnings estimates at $1.80 per share. Similarly, we also maintain our price target at $42 representing an upside of approximately 40% over the current stock price. On a P/E basis, the stock is trading at a P/E of just 17x on our FY2021 earnings estimate of $1.80 per share. &nbsp;
We believe that the current stock price provides an attractive entry point with limited downside for long-term investors. Management continues to diversify its business both in terms of geography and product line in order to reduce its dependence on a single region or product and minimize the impact of competition, poor weather, seasonality and cost fluctuations. The recent restructuring initiatives along with the acquisition of Mann Packing are beginning to help the company to increase revenues, reduce costs and to further improve the bottom-line in the coming period. We expect the stock price to rally once the external environment stabilizes with the company’s fundamentals beginning to revert to normal levels.&nbsp;
For further details please see our attached Earnings Update Report.

Attractive Valuations @ Fresh Del Monte Produce : Earnings Update Report