Chiquita Brands (CQB) announced today that first quarter results will be “substantially lower” than the same quarter a year ago. Of course this is never good news, especially because consensus analysts’ estimates had called for the company to grow first quarter earnings by nearly 16% over the $.51 cents reported last year (excluding 1-time charges). Management did not give a new number to expect, and simply warned it will be worse than last year mainly due to weak European banana demand and pricing (volume down 13%, prices down 11%). The stock of the marketer and distribute of fresh produce fell as much as 3% on the news, but we think attractive value remains despite the downward guidance for the current quarter.
Of course it is disappointing when a company misses their target, but the optimist may see this as an opportunity because management reaffirmed their outlook for the full year. Chiquita management said they still maintain their guidance for full year comparable net income of $110 million to $120 million for fiscal 2010, which would roughly equate to an EPS of $2.45 to $2.68. They expect pricing to improve throughout the year as they will constrain supply in Latin America and Asia. Conservatively, if we assume that headwinds will restrict the company to just reach the lower end of this earnings target range, it yields a simple P/E multiple of only 6.5x. Clearly, that is not an expensive earnings multiple in any market condition.
What Chiquita is saying is that the first half will likely be weaker than the record earnings of 1H2009, but a stronger second half than a year ago will make up the difference. Chiquita’s earnings have been very cyclical in recent years with the first two quarters of the year being far stronger than the latter half. Some of this cyclical nature of earnings is due to highly variable banana costs, but Chiquita suggests that those factors will moderate somewhat in the coming year. Furthermore, Chiquita is benefiting from a more diversified product mix as the 2005 acquisition of Fresh Express gives them a market share leading position in packaged salads as well. Also announced today was a joint venture with yogurt-maker Danone to market chilled fruit beverages in Europe. The partnership will allow Danone to market Chiquita’s “Just Fruit in a Bottle” drinks and Chiquita will receive a one-time cash payment and retain a 49% interest in the venture.
At Ockham, we are maintaining our Undervalued stance on Chiquita despite current difficulty in Europe. The stock is simply too cheap to ignore at these levels and management appears confident that this bump in the road will not derail them from their goals. When we compare how the market has historically valued CHQ for a given level of cash earnings the stock appears quite cheap. Over the last ten years Chiquita has fetched a price-to-cash earnings multiple of 7.86x to 18.89x, but the current metric is only 5.13x. We believe this stock is under appreciated right now, and could reasonably trade in the low $20’s given the current fundamentals. Value investors should always be on the lookout for stocks that are performing well but have fallen out of favor with the market.