Fresh Del Monte: A Good Start For 2021 Wipes Out A Disappointing 2020

Summary

• Fresh Del Monte's share price is spiking after excellent Q1 results, despite a lower revenue.
• Both the income statement and the cash flow statement indicate the situation is improving fast.
• The capex is still outpacing the depreciation expenses but I expect the capex to normalize once the last new vessel will be delivered.
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Photo by Antonio Jarosso/iStock via Getty Images

Introduction

After checking in on Fresh Del Monte (NYSE:FDP) in September last year, I didn’t dare to pull the trigger. And I was wrong as the share price has increased by more than 60% since, including a double-digit percentage increase on Wednesday as the company reported excellent results. The gross margin increased by almost 60% despite reporting a lower revenue.

Data by YCharts

A quick glance at the Q1 results confirms Fresh Del Monte is on the right track

In the first quarter of the current year (which ended on April 2), Fresh Del Monte reported a revenue decrease of almost 3% but as its COGS decreased by almost 6%, the gross profit jumped from almost $69M to $105M, an increase of more than 50%. The gross margin increased to about 10%, coming from just around 6% thanks to an improved performance in all business segments.

Source: Q1 update

Not only did the gross margins increase, Fresh Del Monte also was able to reduce its SG&A expenses by almost $4M and this, in combination with a higher gain on an asset disposal and an impairment reversal resulted in an operating income of just under $60M, which is more than three times higher than the operating income generated in Q1 2020. The pre-tax income of $52.4M and the net income attributable to the shareholders of Fresh Del Monte of $42.7M were a major step forward as the EPS of $0.90 was substantially higher than the $0.27/share reported over Q1 2020.

And Fresh Del Monte’s Q1 performance didn’t remain limited to showing just a paper profit. The cash flow result of the company was exceptionally strong as well. FDP reported an operating cash flow of $46.8M but also invested approximately $18.4M in its working capital position so the operating cash flow pre-WC changes was approximately $65M and just over $64M after deducting the payments to non-controlling interests.

Source: Q1 update

As you can see on the image above, Fresh Del Monte saw its capex double to $33.6M (which is almost 50% higher than the depreciation expenses for the quarter) resulting in an adjusted free cash flow result of approximately $31M (rounded). This compares quite well with the reported free cash flow of roughly $22M (despite the much lower capex in Q1 last year).

2021 could make up for the weak performance in 2020

It’s good to see Fresh Del Monte gaining quite a bit of momentum in the first quarter as 2020 wasn’t exactly a good year. The revenue decreased and with a net income of $1.03 per share for the entire year, FDP has now generated almost as much in net profit in just one quarter compared to the entire financial year 2020.

The cash flows weren’t much better last year as Fresh Del Monte reported an adjusted operating cash flow of $137M and a negative free cash flow result of minus $13M. Of course it wouldn’t be fair to use the 2020 results to make an investment decision on Fresh Del Monte as the company was obviously hit by the COVID pandemic (as supply chains were disrupted) while the capex level also was already trending at in excess of 1.5 times the depreciation expenses indicating quite a bit of money was spent on growth. Fresh Del Monte purchased six new refrigerated container ships of which the final two will be delivered in 2021, so I expect the capex to level off after this year.

Adding the new ships to the fleet will help Fresh Del Monte as it no longer has to charter the capacity while the new vessels are quite large and Fresh Del Monte will likely be able to haul third party cargo as well which could help to keep the net costs down and increase the efficiency of the shipping process.

Investment thesis

Fresh Del Monte reported an excellent result for Q1 2021 and it’s not a surprise to see the market react well to the performance. With an EPS of $0.90 and an adjusted free cash flow result of approximately $31M (including growth capex), Fresh Del Monte seems to be on track for a good year.

The capex will still be rather high this year as the final two new refrigerated container vessels will be delivered this year, and after making $89M in cash payments last year, the vessel-related capex will drop to just about $41M this year so I expect the full year capex to be just over $100M. With the capex coming down to levels that will be comparable to the depreciation expenses, it’s now up to Fresh Del Monte to keep an eye on its operating margins.

The company is off to an excellent start in 2021 but I still don’t have a position but the company definitely remains on my watch list.

Analyst’s Disclosure: I/we 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.

Comments

[zalnabulsi]

Many catalyst are in play going forward. Its still selling at below book in an inflationary environment.

[Robin Heiderscheit]

What does the balance sheet look like? Depending on whether debt is fixed etc. this could be a very nice main street inflation hedge.