The Tide Is Turning For Calavo Growers
Calavo Growers (NASDAQ:CVGW) is a consumer staple company with a rather unique position. As the provider of a singular product, avocados, the company has been both blessed and cursed by the pandemic. On the one hand, demand for avocados has the company growing YOY on a volume basis while on the other, an ample crop and reduced demand from the foodservice industry has prices for avocados in the pits.
The good news for investors is multifaceted; not only has the company seen a steady improvement in foodservice demand but it has also managed to widen profit margins which set it up nicely for 2021. With a vigorous rebound expected to start as early as late in the 2nd quarter demand for avocados and avocado pricing are going to go through the roof.
The Dark Times For Calavo Growers Are Over
As they say, it is always darkest before the dawn and that’s how things look for Calavo Growers. The company’s FQ1 revenue contracted for the 4th quarter in a row but not because of volume. The $220.58 million in revenue is down nearly 20% from last year on pricing and pricing alone.
On a volume basis, the shipments of avocados is up 2% from last year and steadily growing albeit slowly. Another burden to revenue was the fresh foods and RFG segment which suffered increased spoilage due to longer wait times in ports. Fingers crossed but, as the pandemic lifts and the trucking situation gets in line with market needs this situation will reverse.
Moving down the report there is more to like. The company was able to increase the operating margin by 240 basis points to 8.1% and drive positive results on the bottom line. The company’s GAAP earnings of $0.30 beat by $0.08 and reversed a loss in the prior year while the adjusted $0.17 doubled YOY but missed by a nickel.
Business in the quarter-to-date period has stabilized enough the company was able to give positive guidance. Execs are looking for revenue to grow sequentially by 16% to 25% and approach last year’s levels. As for earnings, adjusted EBITDA in the range of $14 to $18 million assumes sequential earnings growth of 50% to 100%.
“We are optimistic about the remainder of 2021, particularly the second half. In the meantime, we are moving ahead with the implementation of our strategic initiatives designed to enhance our long-term growth prospects, capitalizing on opportunities to increase operating leverage, further our sustainability initiatives, and realize synergies across our entire organization, with the goal of improving profitability, sustainability, and shareholder value,” said CEO James E. Gibson.
Calavo Growers Grows More Than Avocados (Dividends)
Calavo Grower has turned out to be a reliable dividend payer despite its pandemic woes. Now, with the reopening only months away, the company’s distribution looks safer than ever. The 1.4% dividend yield is a little low but comes with a high degree of safety in that payout ratios are low, the company has nearly no debt, very low leverage, and a high degree of coverage. If anything, investors should consider that this year’s 10th consecutive increase might be in the range of 10% to 20%.
The Technical Outlook: Calavo Growers Topping Out
It looks like the market for Calavo Growers is topping out after the FQ1 release. Price action began the day higher but the bottom quickly fell out leaving the near-term direction up in the air. At best, investors should expect to see this stock move sideways within a consolidation while we wait for reopening to catch up with expectations. In that scenario price action should continue to move higher over the long-term. At worst, this stock will pull back to a stronger support level, possibly near $76, before consolidating for another rally. In either case, we view Calavo Growers as a stock that needs to be watched.
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