Calavo Growers Inc. (NASDAQ:CVGW), headquartered in Santa Paula, California, provides fresh avocados and tomatoes from several farming operations externally operated in the US, Mexico and Chile and processed products to countless wholesalers, retailers, distributors and operators around the globe. Packing over 200 million pounds of avocados yearly, the company handled 35% of California's and 26% of Mexico's avocado crop in 2005 and that same year made its first shipment to China, an international market with tremendous potential in the future. With the increasing popularity of avocados at home along with the growing use of avocados in prevailing dishes worldwide, Calavo Growers Inc. is the forerunner of the global avocado industry with extremely favorable potential.
Small cap agriculture stocks such as CVGW will become the benefactors of evolving consumers as demand for food increases with population. Worldwide food demand is likely to double in 2050 and companies must increase production through modern science and innovation. Furthermore, with the worldwide trend shift in which consumers demand fresh, organic, safe and local foods, small-cap food producers become key players in this changing market. In March of 2013, CVGW created FreshRealm LLC, a fresh food cloud-based technology business that will create a platform for food industry participants to efficiently run their business. Calavo will hold the majority of shares in this business that will ultimately serve as an engine connecting fresh food producers to a network of consumers. The scarcity in small cap agricultural companies means that big winners are likely to come from the selected few. Another microcap agriculture producer, Limoneira Company (NASDAQ:LMNR) is also worth noting as Calavo owns 15% of the company. LMNR is one of the largest lemon producers in the U.S. and has recently partnered with Canadian experts to expand the innovative use of lemons including health, beauty and cleaning. The campaign is likely to increase lemon consumption in the future according to CEO Harold Edwards.
Calavo is not without its challenges. Every distributor has to deal with fluctuating fuel costs which can seriously hamper the bottom line. Diesel fuel, most commonly used in ground transportation, has been holding relatively steady this past year. This change from the steep increases of the previous 5 years has made predictability and profits more consistent. Should diesel spike from its current rate, around $3.60/gallon, it could cause produce prices to go up enough to lower demand. For now that is not a problem because crop sizes have been suffering in the most recent quarter as a result of irregular weather patterns in southern California. However summer is expected to have a much larger crop yield and the smaller sizes have actually temporarily increased demand past supply driving prices of avocados up. This paired with a near record volume should mean a record setting year for Calavo and other major distribution sources.
On the financial side of things CVGW has a trailing P/E of 27, offers a dividend yield of 2.08%, a payout ratio that is 57%, and its margins have been stable for the last five years. During the final quarter of 2012, Calavo achieved the highest net income for any period and that momentum has continued into 2013 the stock is up 23.76% year to date. Calavo operating efficiency has also enabled more than $9.6 million in dividends, an 18% increase from the previous year to $0.65 per share. The outlook for 2013 is quite optimistic as the company expects record operating results and gross profit on revenue growth. Proper delivery and handling of fresh produce is science and Calavo has it down. Despite being near an all-time high with a valuation that follows I like their prospects to handle more volume and gain market share.
Disclosure: I 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.