Bear of the Day: Fresh Delmonte (FDP)


March 27, 2013 |

Just about everyone knows that the world’s population is increasing and thus global food demand is in turn on the rise.  For those of us fortunate enough, it's certainly an area of potential profitability.  As an investor, there is a right way and a wrong way to profit from mounting food demand and lately it seems that Fresh Del Monte Foods is on the wrong end of that profit scale.

I’m sure you’ve heard the name, as Fresh Del Monte Produce Inc. is a world leader in the production, distribution and marketing of fresh produce. The DEL MONTE brand name is widely recognized in everything from bananas and pineapples to fruits and melons. The deciduous fruit the company sells includes primarily grapes, plums, nectarines, peaches, apricots, cherries, apples, pears and citrus.

Keep in mind that Fresh Del Monte Produce is separate from the Del Monte Company that manufactures food and pet products under brands such as namesake Del Monte, S&W, College Inn, Meow Mix and Kibbles 'n Bits; it was taken private in 2011 by KKR.

Regardless of the bad news and massive restructuring, investors are still buying the stock.  The problem is that it might not be the right choice for everyone and may take quite a while to get all the cockroaches out. 

Spoiled earnings
Revenue for the last quarter fell 0.5% year over year to $776.90 million in the quarter.  Analysts expected close to $800 million in revenue which would have equated to earnings of 7 cents.  Instead the company reported flat earnings, a huge miss.

GAAP EPS were -$0.01 for Q4 versus -$0.18 per share for the prior-year quarter and seemed to add to the already bearish earnings trajectory.  The only good news seemed that margins improved slightly.  For the quarter, gross margin was 5.1%, 1.4% better than the prior-year quarter. Operating margin was -0.1%, 2.5% better than the prior-year quarter. Net margin was 0.0%, 1.3% better than the prior-year quarter.

After the report, there have been several downgrades to the stock and we have seen the Zacks Consensus drop for all reporting periods. Analysts are now looking for growth of -19% for FY2013, but a recovery of almost 20% growth in FY2014.

Shares resilient despite financial woes
What’s interesting is that shares have held their bullish trend through all this mess.  Even as losses were mounting and sales lacking any momentum, the stock is remarkably still in a somewhat bullish trend.  A breakdown below the $26.75 level could spell a short term technical meltdown for FDP, so watch that level closely. 

Perhaps the forward p/e of 13.08 is attracting investors for the long term, but with its recent earnings growth history (or lack thereof), global economic uncertainly and competition, Fresh Del Monte might be a stock you should substitute for a agri-stock in a slight different  space with a better Zacks Rank and financial picture.

CF Industries (CF - Free Report) , a Zacks Rank #3 stock or CVR Partners (UAN - Free Report) , a Zacks Rank #1, might be a couple to look at as alternatives.

In the meantime, FDP analysts are not expecting much when they report earnings on May 7th.  Zacks Consensus Expectations are for earnings of 94 cents, but I suspect they will come down from that level just ahead of the report. 

Jared A Levy is one of the most highly sought after traders in the world and a former member of three major stock exchanges. That is why you will frequently see him appear on Fox Business, CNBC and Bloomberg providing his timely insights to other investors. He has written and published two tomes, “Your Options Handbook” and “The Bloomberg Visual Guide to Options”.  You can discover more of his insights and recommendations through his two portfolio recommendation services:

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