When analyst Brett Hundley of BB&T Capital Markets upgraded Chiquita Brands International Inc. shares to a "buy" rating in June, he asked, rhetorically: "Are we bananas?"
Pun aside, it was a fair question, given that Wall Street analysts had abandoned the company after years of erratic performance. In the decade since its emergence from bankruptcy, Chiquita shares would rise on the promise of growing earnings, only to repeatedly fall 50 per cent or more on disappointing results.
The summer of 2012 was the most recent occurrence. New management was making promises about a fresh strategic plan, but shares traded below $5 (U.S.), off 75 per cent from 2008 levels. In a column last fall (tgam.ca/milstead-chiquita), I suggested the numbers were so bad, the shares would likely "remain spoiled."
That has turned out to be wrong. As it happens, Chiquita management is delivering on its promises, and earnings are rising handsomely. The shares had doubled from their lows by the time Mr. Hundley made his call; they are up another 17 per cent since, to $12.66 Tuesday.
Given the volatility in Chiquita's share price, it's hard to recommend the shares as a long-term, multiyear holding. It seems likely, however, that holding the stock for the next year or so will be, well, fruitful.
So, what has management done right? The promise in August, 2012, to "immediately execute a restructuring plan to strategically transform Chiquita into a high-volume, low-cost operator" sounded like typical corporate-speak, but it seems to be coming true under new CEO Edward Lonergan, hired to execute the plan.
The company dumped small, unprofitable businesses, such as avocados, grapes and a line of snacks sold in Europe. It plans to focus on its namesake banana business, which makes up about two-thirds of sales, plus its packaged salads, primarily sold under the "Fresh Express" brand.
The company is cutting administrative costs, but has also found savings through improved purchasing and better productivity at its banana farms. (Chiquita grows some of its own bananas, and buys others and its lettuce from outside suppliers.) It is also consolidating operations in its salad business.
And the company has avoided price wars, ending unprofitable banana contracts in Europe, where it's the No. 1 brand.
The company's second-quarter results, announced last week, reflect the program. Even as sales fell year-over-year, owing to the divestitures and the more disciplined banana sales tactics, profit came in at five times the prior-year level and 50 per cent above the expectations of the small group of analysts who follow the company.
So why didn't the stock rocket again in recent days? Perhaps because Chiquita management didn't raise its earnings outlook for the year and called the supply and demand for bananas "balanced." BB&T's Mr. Hundley said management was "unwilling to take a more structural, positive tone."
However, Mr. Hundley says the guidance is appropriate "as the industry is volatile, and conditions can change quickly." The cost-cutting gives Chiquita "considerable buffer," he believes; while Chiquita's banana sales came in at his expectations in the second quarter, the segment's margins, at 10.6 per cent, were more than four full percentage points better than he'd modelled.
Even with the rapid runup in Chiquita shares, the stock price remains in line with other fruit companies, such as Dole Food Co. Inc. and Fresh Del Monte Produce Inc. and is cheaper than most packaged-food companies.
And with so little Wall Street coverage – just three analysts joined the conference call last week – the likelihood of large, positive earnings surprises seems greater than with more heavily followed companies. That, in turn, can lead to more rapid appreciation.
An article in the U.S. investing weekly Barron's in April illustrates the point, as it said the shares, then $7.25 apiece, "could rise 20 per cent or more in the next 12 months," and an analyst estimate of $12 suggested that "over the next few years, Chiquita's shares could have plenty of upside."
Chiquita may have already blown through those targets, but more gains are possible. And that's not bananas.