Fresh Del Monte: It’s All About The Cash Flows, But Expect Volatility To Remain Present (NYSE:FDP)

Introduction

Fresh Del Monte (FDP) is one of the world’s largest producer, marketer and distributor of fruit products and although about two-third of its sales are generated in North America, the company is active all over the world, resulting in the company offering interesting exposure to several continents.

Source: annual report 2019

The first semester was very decent

In the first six months of the current financial year, Fresh Del Monte reported a total revenue of $2.2B, which is a 6% decrease compared to H1 2019. Fortunately, FDP was able to reduce its operating expenses by 9% as well which helped to keep the damage limited. Yes, the gross profit decreased sharply, but the result clearly wasn’t as bad as it could have been. The net income of $31.1M, of which $30.9M is attributable to the company’s shareholders, is relatively weak as well, but this is a direct result of the lower gross profit in H1 2020 whereas the company also booked an exceptional gain on a disposal in H1 2019 which boosted the results in the first semester of last year.

Source: SEC filings

Additionally, COVID-19 made things more difficult for Fresh Del Monte as it had to write off about $11M of goods, which couldn’t get sold in time. As some of the produce has a relatively long lead time (think about bananas being shipped from South America on a boat), it takes a little bit of time to rethink the logistical chain to make sure the supply side meets the demand side; so we should cut FDP some slack here.

FDP successfully protected its cash flows. It reported an operating cash flow (adjusted for working capital changes and the dividend paid to non-controlling interests) of almost $79M and after deducting the $36M in capex, the free cash flow result was $43M. Definitely not as good as the adjusted operating cash flow of $130M and free cash flow of $60M in H1 2019, despite having spent less on capex as it postponed investments from H1 to H2 and even 2021.

Source: SEC filings

Fresh Del Monte continues to buy back stock as well. The company repurchased 0.55M shares in the second quarter and only had to spend $13M to buy those shares, indicating it paid an average of almost $24/share.

We can’t just extrapolate the H1 results due to the seasonality of the business

Keep in mind this producer and distributor of food products is impacted by seasonal effects. Traditionally, its first semester is more profitable than the second semester, and in 2019 approximately two-third of the gross profit was generated in the first six months of the year. Additionally, the annual report of FY 2019 tells us the company barely generated a pre-tax income in FY 2019.

This means we cannot just multiply the H1 results by two to figure out how Fresh Del Monte will perform in the entire financial year, and I thought it would be a good exercise to have a closer look at Fresh Del Monte’s full-year 2019 cash flow results based on its annual report.

The net income attributable to the shareholders of the company was approximately $66.5M or $1.38 per share and the net income has been all over the place in previous years as FDP reported a net loss in FY 2018 although this was entirely caused by a $54M impairment charge on assets and goodwill.

Looking at the cash flow statements for FY 2019, Fresh Del Monte reported an operating cash flow of $169M but this also included an $8M investment in the working capital position and excludes a payment of almost $5M to non-controlling interests. So on an adjusted basis, the operating cash flow was approximately $172M.

Source: annual report

A decent result as the capex was only $122M, indicating FDP generated a free cash flow result of $50M for a free cash flow result of approximately $1.03/share, given the average share count of 48.3M shares throughout FY 2019. The share count has now decreased to 47.34 million shares, so we can reasonably expect the per-share performance to improve as well. It’s also important to note the $122M capex in FY 2019 was approximately 25% higher than the $98M depreciation expenses.

Investment thesis

Fresh Del Monte is an interesting company. Its free cash flow results in FY 2019 and H1 2020 were good, but investors should be aware it will never be easy to make accurate estimates regarding the profitability of the company as there are several important parameters that will be caused by external factors.

The volatility in the financial results the past few years is also discouraging me to invest in Fresh Del Monte although I will keep close tabs on the company as I currently have very little exposure to the sector while the tangible book value of $23.5/share makes FDP reasonably valued. I will keep an eye on the option premiums as writing an out of the money put option may be my preferred strategy to initiate a position further down the road.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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