I love bananas. They are healthy and somewhat filling, and are great sources of soluble fiber and potassium. They are great as a breakfast food, snack or even in a dessert; they go great with chocolate, peanut butter and other readily available foods. Bananas are even radioactive, although the levels are well below harmful levels.
Chiquita Brands International Inc. (CQB), the famous yellow fruit company which holds the number one banana market position in Europe and the number two position in North America, sources approximately one-third of all bananas sold worldwide. Despite a popular product, consumer name recognition and a global market, fruit companies operate in an asset- and labor-intensive industry, two things that eat up profit and return ratios. These companies are generally price-takers, having little control over retail prices and production costs; the latter being driven by weather, political turmoil and labor costs.
Investors rarely find steady capital appreciation in these types of companies, but as with any industry, opportunities arise when bad news sends a company to the bargain basement. An examination of Chiquita's performance shows a company that is selling at a sharp discount to recent prices. Chiquita's stock price is down 71% from $16.69 in February 2011 and down 43% from $10.32 in February 2012. Part of the sharp decrease in stock price can be attributed to lower-than-expected first-quarter 2012 operating results based on lower banana prices, lower salad sales volumes, and higher fuel costs.
Is Chiquita's price slip justified, or has it been pushed too low? I ran it through my four tests (three screens and a final formula) to determine my target price.
1. Tobin's Q
One of the quickest and easiest ways to screen a candidate is a famous little formula known as Tobin's Q. Tobin's Q compares the market value of the company to the total assets of the company. A result less than 1.0 generally indicates that a company is undervalued based on assets and it is my first step when evaluating a company. Chiquita's result is a 0.11, which tells me that Chiquita's assets are almost 10 times the current market value of the company.
2. Net-Net Method
While on the subject of assets, a vintage-but-still-relevant value test is known as the Oppenheimer Net-Net Method. This method subtracts Total Current Liabilities from Total Current Assets and adds in 1/3 the value of Fixed Assets. The result is divided by the number of shares to reach an intrinsic value based on a conservative estimation of asset liquidity. This formula is so conservative that rarely will a company pass this test, but when a company does, it is a great sign of investment safety. My rule is a 30% margin of safety and as long as the company can make an acceptable return on assets, I assume the stock price is well below its true value. An alternative way of looking at this equation is if the company passes, the investor is "purchasing" assets for a discounted rate. How does Chiquita perform on the Oppenheimer Net-Net Method? It easily passes with a $9.68 intrinsic value for a 50% margin of safety.
3. Buffett Formula
The Buffett Formula, a intuitive and simple formula compiled using statements from the Sage of Omaha himself, values a company on Net Income + Depreciation - Capital Expenditures and discounts using the 30-year Treasury Bond Yield. I prefer to discount by a higher yield to more appropriately match the true cost of borrowing for a non-government entity. My automated formula uses the average investment grade bond yield. Chiquita easily passes the Buffett Formula with an intrinsic value of $29.62 for an 84% margin of safety. This result is also consistent with historical value; going back the past three years, the company has maintained an average 86% margin of safety.
So we see that Chiquita passes the three fairly simple, single-line equations. I never invest based solely on the results above - these are just screening methods to find companies that might pass my Valuator™ formula, which is a combination of the Buffett Formula result with a thorough Valuation by Multiples calculation. Valuation by Multiples compares the financial ratios of selected comparable companies to the ratios of Chiquita. Ratios used in this approach include Price/Earnings, Price/Sales and Price/Book Value, among other ratios. This method determines how under- or overvalued Chiquita is compared to its industry and is one of the most widely used methods of valuation.
I choose Dole Food Company Inc. (DOLE), Fresh Del Monte Produce Inc. (FDP), Calavo Growers Inc. (CVGW) and SunOpta Inc. (STKL) for my comparables. Chiquita easily passes Valuator with a consensus very close to the former equations. My intrinsic value, which is my final target price and buy/sell determination, is $27.60 for an 83% margin of safety. This price seems high compared to the current market price, but Chiquita was over $24 per share in May 2008, when fuel prices were higher than any time in recent history.
Just because Chiquita passes value investing formulas does not mean it is an automatic buy. Investors must take into account three factors that led to the price decrease and may hold the price down long-term:
1. Operating Margins
Comparing my comparable basket ratios to Chiquita shows just how difficult it is in this industry to have price flexibility. First, Chiquita's ROE and ROA are 60% and 65% below the basket average, respectively. Its profit margin is half the basket average. One would assume the basket is a poor comparison to Chiquita's operations, but take into account the absolute difference between the results, not just the percentage difference. Investors should be prepared to accept low ratios in these categories as evidenced by Chiquita's results:
Basket Average: 1.55%
Return on Equity
Basket Average: 6.94%
Return on Assets
Basket Average: 4.27%
The low ROA makes the Oppenheimer Net-Net results less appealing, but the difference between asset value and market value tells me there is a lot of room for the stock price to increase before an investor is overpaying for low-margin assets.
2. Pending Litigation
Chiquita will have to defend eight lawsuits filed on May 31st brought forth by hundreds of Latin American workers claiming Chiquita has compromised their health by exposing them to harmful pesticides. While this could negatively affect the company's cash position, Chiquita's direct competitors such as Dole Food Company Inc. are named in the lawsuits, which should not adversely harm Chiquita's industry position.
Chiquita is highly leveraged, as shown by its Debt-to-Equity ratio of 1.48. This affected S&P's May 18th decision to revise its rating outlook on the company from stable to negative. Chiquita is still slightly below the comparable basket average D/E ratio of 1.73, but ideally I like a company with a ratio of 0.50 or less. This is of special importance in an industry such as this where crop disease, weather and socio-economic factors can create a liquidity crisis.
Despite the items of concern, I believe Chiquita's price has been pushed down too low and is a buy opportunity. I would revalue the company each quarter to be sure to account for changes in the target price based on earnings increases or decreases, noting that the current trend has been lower earnings. Banana peels are slippery but not dangerous if you tread carefully. If you buy Chiquita be sure you know where you stand.