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Chiquita's new leadership may not halt a slipping stock price Add to ...

When Chiquita Brands International CEO Fernando Aguirre resigned this week, much was made of his past appearance on reality show Undercover Boss.

The problem for Chiquita, however, has been that for quite some time, it’s been an underwater stock.

Some years ago – probably 2006, I suspect from the historical record – I bought a handful of shares around $12 (U.S.) because it looked like a good value pick. Two years later, I was sitting on a 100 per cent gain – until some sort of earnings disaster wiped out nearly half the value, and I escaped around $15.

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Although it’s had its moments in the high teens since then, Chiquita shares have been on a pretty consistent downward slide since early 2011; the shares traded Friday around $5.75.

And despite the company’s search for fresh leadership, and the bump the shares received on Mr. Aguirre’s resignation, it seems quite possible the stock will remain spoiled.

The earnings release this week that came in conjunction with the personnel announcement illustrated the challenges. Second-quarter sales dropped more than 4 per cent year over year. Net income of 12 cents per share compared with $1.68 per share in 2011’s second quarter. Cash flow from operations was $8-million for the second quarter 2012 compared with $103-million in the prior-year period.

The sad news? Chiquita management said the results exceeded their expectations because of difficult pricing comparisons and serious earnings damage from the weakness of the euro. (In a statement, Mr. Aguirre also said “we do not believe that Chiquita’s second-quarter results reflect the sustainable earnings potential of our business.”)

Nearly two-thirds of Chiquita’s sales come from its namesake banana; most of the rest come from its “salads and healthy snacks” segment, led by the Fresh Express line of bagged salads. While banana sales have fallen nearly 4 per cent in the first six months of the year, the salads segment, expected to be a growth engine, has also posted a small decline.

Chiquita’s solution, announced this week, is to “immediately execute a restructuring plan to strategically transform Chiquita into a high-volume, low-cost operator.”

But virtually no one on Wall Street is listening anymore. According to Bloomberg, analyst coverage is down to three of the Street’s smaller firms, and all of the analysts have “hold” or “neutral” ratings.

Analyst Scott A. Mushkin of Jefferies & Co. Inc. says Chiquita’s expanded salad offerings are “likely to have little impact on volumes until next year, in our opinion” and “management’s decision to cut expenses to the bone … looks to be the best (and only) course of action that should provide a bridge into 2013.”

Mr. Mushkin’s target price is $5.50, a multiple of six times the company’s EBITDA, or earnings before interest, taxes, depreciation and amortization. He considers an upside scenario of $9 if earnings grow faster than he expects and the multiple expands slightly.

But his downside scenario? If the economic outlook in Europe and North America deteriorates further, foreign currency effects get worse, and salad sales wilt, earnings could fall and the multiple could shrink to 5 – yielding a target price of $2.

That would represent a bunch of trouble for investors.

 

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