Stable financial performance from fresh fruit producer Dole (NYSE:DOLE) driven by pricing. Long term strategy is focused on expanding into high-growth markets like avocados, berries and organic produce. Valuation appears fair.
Company Overview
Dole grows, sources, produces and sells fresh fruits and vegetables. The company’s fresh produce is grown and sourced from over 30 countries, and sold to over 75 countries worldwide across retail, wholesale, and foodservice channels.
Dole operates a vertically-integrated business model, with an extensive asset base across the entire supply chain which includes 114,000 acres of farms, a fleet of refrigerated container carriers, an extensive production and storage network of manufacturing plants, cold storage facilities, and packing houses.
Dole’s operating segments are as follows:
Fresh Fruit: this segment primarily sells bananas and pineapples sourced from local growers or Dole-operated farms, predominantly located in Latin America, and sold throughout North America, Europe, Latin America and Asia. The segment also operates a commercial cargo business which offers available capacity to transport third party cargo on company-owned vessels which are used to transport Dole’s bananas and pineapples internationally. This is one of their biggest segments accounting for over a third of revenues.
Diversified Fresh Produce – EMEA: this segment includes Dole’s businesses in Ireland, Netherlands, Spain, Portugal, France, Italy, U.K., Sweden, Denmark, South Africa, Eastern Europe and Brazil, which sell a variety of imported and local fresh fruits and vegetables through retail, wholesale, and in some instances foodservice channels across Europe. This is one of their biggest segments accounting for over a third of revenues.
Diversified Fresh Produce – Americas & ROW: this segment includes Dole’s business in the U.S., Canada, Chile, Peru, Argentina and India, all of which market fresh produce from company-owned farms or sourced from third party growers across retail, wholesale, and foodservice channels. This segment accounts for around a fifth of revenues.
Dole’s Fresh Vegetables segment which sells value-added salads was sold to Fresh Express in January this year. This is the smallest segment accounting for less than 15% of revenues. This is also their only unprofitable segment (the segment generated a negative profit margin of -2.7% in FY2022).
2Q 2023: revenue growth driven by pricing, margins continue to expand
For Q2 2023, revenues rose 4.4% YoY to $2.1 billion, accelerating from the previous quarter when revenues inched up 0.96% YoY. For 1H 2023, revenues were up 2.7% YoY.
Growth was largely driven by strength in their Fresh Fruit and Diversified Fresh Produce – EMEA segments offset by continued weakness in Diversified Fresh Produce – Americas & ROW segment.
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Fresh Fruit revenues were up 4.1% YoY driven by higher pricing of bananas and pineapples worldwide and an increase in banana volumes sold offset by a drop in pineapple volumes. For 1H 2023 revenues are up 5.3% YoY to $1.6 billion.
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Diversified Fresh Produce revenues rose 7.7% YoY driven by price increases as the impact of acquisitions. For 1H 2023 revenues are up 4.4% YoY to $1.7 billion
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Diversified Fresh Produce – Americas & ROW segment continued its declining momentum largely due to a challenging market for berries; after dropping 8.8% in Q1 2023, revenues declined 6.8% in Q2 2023 primarily driven by lower volumes, offset by price increases. For 1H 2023, revenues are down 7.8% YoY to $840 million.
For the remainder of the year, management is confident of delivering a stronger 2H 2023 than the previous year. The company expects capital expenditures of $110 million for FY2023, a slight increase from last year’s $98 million.
Long term expansion focused on avocados, berries and organic produce
Dole’s long term expansion strategy is focused on expanding into fast-growing fresh fruit markets, specifically avocados, berries and organic produce (bananas and pineapples are the company’s key products currently). Avocados and berries including raspberries, strawberries and blueberries have seen among the highest increases in consumer demand over the past decade in the U.S., despite all of them having generally high price points relative to other fruits, suggesting an opportunity for market share gains for players with scale advantages like Dole.
Meanwhile, growing consumer demand for healthier food options is driving organic food demand which, despite macro challenges, rose 4% last year to an all-time high with organic produce leading the way. Yet, with organic produce being generally costlier than non-organic, penetration remains low despite strong consumer demand which indicates plenty of runway for further growth; organic produce sales at $22 billion in the U.S., represented just 15% of total fruit and vegetable sales in the country.
Scale economies could be the key to narrowing the price difference between organic and non-organic produce and Dole, with their extensive worldwide asset base across the entire fresh produce supply chain is among the best positioned to fulfill this gap.
Margins
Fresh produce is generally a low-margin business and Dole’s operating margins have largely remained steady in the low single digits. Dole’s strong brand name positions them well to pass on cost inflation to consumers. Meanwhile the sale of their loss-making fresh vegetables segment may positively impact margins albeit only marginally.
Risks
Commodity risks
Fresh produce are essentially commodity products and price volatility may impact earnings. Bananas and pineapples – Dole’s two key fruit categories – are currently enjoying high prices in some regions, helping offset sagging berry prices. However, if banana and pineapple supply increase in response, market prices may fall impacting Dole’s earnings.
In addition, yield declines due to unforeseen events such as adverse weather conditions or crop diseases could impact sales volumes and profits which may result in share price volatility.
Conclusion
Dole has a buy analyst consensus rating.
On a free cash flow basis, Dole doesn’t appear unreasonably priced. The company generated free cash flows of roughly $140 million last year. Taking their current market value of $1.1 billion translates into an FCF yield of around 12%.
Dole’s forward P/E of 11.5 is roughly the same as Fresh Del Monte Produce (FDP), arguably one of its closest peers in terms of scale, product offering and financials.
Dole |
Fresh Del Monte |
|
Gross margin % |
6.9% |
7.6% |
Operating margin % |
1.2% |
2.2% |
Return on assets % |
2.1% |
3.5% |
Forward P/E |
11.5 |
11.2 |
For a relatively low-risk, low-profitability, single-digit growth rate company in a defensive industry their current valuation appears fair. The stock could be viewed as a hold.