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Should You Exit From This Small-Cap Food Products Provider – FDP

Apr 01, 2022 | Team Kalkine
Should You Exit From This Small-Cap Food Products Provider – FDP

Fresh Del Monte Produce, Inc.

Fresh Del Monte Produce, Inc. (NYSE: FDP) is a global producer, marketer, and distributor of fresh fruits and vegetables. It also manufactures and distributes juices, beverages, and snacks. Retailers, foodservice operators, wholesalers, and other distributors get the merchandise. The company operates a trucking company and uses asset-based carriers to distribute by land, and it delivers by sea using its fleet of ships combined with hired chilled vessels.

Why should Investors make an Exit?

  • Industry Lagging Margins: The company's Gross, EBITDA, and Net Margins have improved year over year. However, in FY21, its Gross, EBITDA, and Net Margins were 7.1%, 4.9%, and 1.9%, respectively, significantly lower than the industry medians of 27.6%, 12.8%, and 4.1%. Below-industry margins suggest that the company lacks competitive strength against its peers.
  • Long Cash Conversion Cycle: The company's cash conversion cycle has not improved significantly from 61.7 days in FY20 to 61.8 days in FY21 (ended December 31, 2021). Its cash conversion days remain higher than the industry average of 44.1 days, showing that it takes longer to convert inventories to cash.
  • Decline in Cash Flow from Operations: FDP reported a 28.84% decline in net cash provided by operating activities to USD 128.5 million during FY21 from USD 180.6 million during FY20.
  • Leveraged Balance Sheet: As of December 31, 2021, the company's cash and cash equivalents stood at USD 16.1 million, with total debt (including finance lease liabilities) of USD 529 million.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

FDP's stock price has been on a bearish trend throughout the year, fallen 21.82% in the past nine months, and is currently leaning towards the lower band of its 52-week range of USD 24.10 to USD 36.57. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 23.00.

Considering the current trading levels, leveraged balance sheet, a decline in cash position, industry lagging margins, and current valuation, we recommend a "Sell" rating on the stock at the closing price of USD 25.91, down 0.35% as of March 31, 2022.

Three-Year Technical Price Chart (as of March 31, 2022). Source: REFINITIV, Analysis by Kalkine Group

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.