Calavo Growers (NASDAQ:CVGW) Is A Tasty Bet On Economic Reopening

Wednesday, December 23, 2020 | Thomas Hughes
Calavo Growers Is A Tasty Bet On Economic ReopeningDemand Rises For Calavo Growers

If the name Calavo Growers (NASDAQ:CVGW)  is ringing a bell for you it is because you’ve probably seen or heard the name before. Calavo Growers is the nation’s largest supplier of avocados which are a fast-growing segment of the food market. The company hasn’t been immune to the pandemic, far from it. While demand for its products continues to grow the growth has been subdued and supply issues are dragging on pricing. With the restaurant industry on the rocks, there are far fewer places to get avocado toast and guacamole than there used to be, and far less traffic than there once was.

 Calavo Growers Down But Not Out

Calavo Growers had a rough quarter but the tides may be changing. The company reported $234.43 million in revenue or down nearly 20% on a YOY basis but there are some mitigating factors. The first is that the demand for product increased by 3.0% on a consolidated basis. Revenue fell short because the supply of avocados was robust this year and there was no outlet for the overages. This led to lower prices within the avocado market, 22% lower, which may persist over the winter.

The upshot is that, with the vaccine-supported reopening on the horizon, the company is leveraged for growth. Widespread reopenings within the hospitality sector should lead to increased demand, tighter supply, and higher realized prices for those yummy avocados.

Another positive within the FQ4 report is the margin. The gross profit of $21 million came in at 9% of revenue versus the 8.4% reported last year. This ends the trend of declining margin set earlier in the year but was not enough to boost earnings in light of the revenue decline. The GAAP EPS of $0.35 is a quarter shy of the consensus while the adjusted earnings of $0.34 missed by $0.30.

“Our fourth-quarter results reflect a continuation of trends from the third quarter. With strong crops out of both Mexico and California, supply in the fourth quarter was plentiful, lowering the average selling price by 22% versus the year-ago quarter, when supply was very constrained. Many foodservice outlets remained unavailable to absorb the crop size and quality dispersion, which has historically helped to maintain margins. As a result, (full-year 2020) revenue and gross margin declined year-over-year.

Calavo Growers Is Growing Its Dividend, Too

 Calavo Growers is attractive as a dividend growth stock as well. The company has been increasing the payout consecutively for 9 years and in-general for nearly 20. The company pays an annual distribution that is worth about 1.75% with shares trading near $66 and it is relatively safe. The company is paying out about 50% of its earnings which leaves ample free-cash-flow for other obligations should they arise. Regarding debt, the company has only $27.6 million in total debt and over $135 million in liquidity with very high coverage of existing obligations. The downside is that the company’s next payout isn’t due until next December.

 The Technical Outlook: Calavo Falls Hard On Q4 Results

Shares of Calavo Growers fell hard after the Q4 results on a variety of factors that include the shortfall in revenue, uncertain/negative outlook for the first quarter/half of 2021, and short-selling. The short-interest on this stock is running near 10% but that trade may already be over. The plunge in prices sparked a strong rebound that more than likely includes a fair amount of short-covering. In the near-term, investors should watch the $65 and $62.50 levels for signs of support. If support holds price action will likely move sideways until a new base of support can build up. Longer-term, this stock is set to move higher in tandem with a broader economic recovery. The only question is when.

Calavo Growers Is A Tasty Bet On Economic Reopening

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Calavo Growers (CVGW)1.7$79.91-0.1%1.44%-102.45Hold$79.25
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