Fresh Del Monte profits stagnate amidst rising demand for fresh food
They announced diluted earnings per share of $1.36 for their second quarter, a decrease from $1.86 per share during the same period in the prior year. A closer look at Fresh Del Monte Produce is needed to better understand why their bottom line is not growing in what should be a favourable environment for the Company.
Fresh Del Monte Produce produces, distributes, and markets fresh fruits and vegetables throughout the globe. The Company had $4.0 billion in sales in 2016, with sales spread across North America ( 55.5%), Europe (16.8%), the Middle East (14.2%), and Asia (11.9%).
Bananas and pineapples constituted 57% of sales in 2016, down from 90% in 1996. Fresh-cut products and prepared food represented 13% and 9% of revenues in 2016, respectively. The balance of sales came from avocados (6%), non-tropical fruit (6%), tomatoes (2%), vegetables (1%), and other products and services (3%).
A significant increase in revenues has coincided with the diversification of the portfolio, with sales having more than tripled from $1.2 billion in 1996. However, the Company has not been able to translate increased sales into earnings, as shown in the graph comparing revenue to EBITDA.
Given the capital-intensive nature of the business, it is not surprising that Fresh Del Monte Produce has an average return on invested capital of 6.7% over the last decade. With a working average cost of capital estimated to be near 5.4%, it is easy to see why the Company has had a hard time generating profitable growth.
In addition to operating a capital-intensive business, Fresh Del Monte Produce is also subject to commodity pricing pressures. In their Q2 release, the Company stated that earnings were negatively impacted by excess banana supply in two regions and low pineapple concentrate prices. Variable commodity prices in turn have generated relatively large swings in Fresh Del Monte Produce's gross margins, which has driven earnings into negative territory during certain periods over the last five years.
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