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Coverage Initiation: Calavo Growers (CVGW)
Calavo Growers (CVGW) is a specialty company in the produce arena, focusing primarily on avocados and avocado based products, though it also handles tomatoes and Hawaiian grown papayas, among other items. It also creates and sells prepared foods, primarily based on avocados, in its Calavo Foods division.
Before becoming a publically traded company, it was a privately owned agricultural cooperative. In October 2001, the company completed a series of transactions whereby common and preferred shareholders of Calavo Growers of California (the predecessor cooperative) exchanged all of their outstanding shares for shares of Calavo Growers. At the same time, the cooperative was merged into Calavo Growers, effectively converting the cooperative into a publically traded, for-profit company with the former owners of the cooperative owning the public company.
Calavo sells avocados to supermarket chains, wholesalers, food service and other distributors, under its own brands, as well as under private label contracts. The company’s brand portfolio includes Calavo, RFG, Avo Fresco, Bueno, Calavo Gold, Calavo Salsa Lisa, Salsa Lisa, El Dorado, Tico, Maui Fresh International, and Triggered Avocados, among others. This segment represented about 80% of the top line in fiscal 2011 (years end in October). In fiscal 2011, the company’s top five customers accounted for about 22% of revenues, while the largest 25 represented approximately 44% of the top line. No single customer represented more than 10% of revenues. Indeed, the markets the company serves are fragmented, though a number of large players exist in each.
The storage life of fresh avocados generally ranges from one to four weeks, depending upon the maturity of the fruit, the growing methods used, and the handling conditions in the distribution chain. The Hass variety of avocado is the predominant variety marketed on a worldwide basis, and are available from California on a year-round basis. Calavo has agreements with around 1,900 California growers, reporting that it handled 28% of the avocados grown in California in 2011. The California avocado market has nine major avocado handlers, heightening the competition for growers’ crops.
The company maintains direct contact with growers in California, so that it can better prepare sales plans. Avocados are graded, sized, packed, cooled and ripened for delivery to customers in its facilities. Calavo’s ability to estimate the size and timing of the delivery of avocados has a substantial impact on both its costs and the sales price it receives for the fruit. The cost to handle and process avocados is largely fixed, so the volume and timing of crop harvests can have a material impact on the bottom line. The fixed cost nature of its operations makes the expansion of its grower relationships an important part of the company’s growth plans.
Calavo also imports avocados from Mexico, Chile, Peru, New Zealand and the Dominican Republic. The company believes that increasing its market share in other markets will help to diversify its business and, ultimately, help to stabilize operations over time. Avocados are usually handled on a fee basis, but other methods, such as consignment, are also used, particularly when sourcing from foreign markets.
The Calavo Foods division primarily makes and markets avocado based foods, such as guacamole, and accounts for about 20% of companywide sales. This group freezes avocado pulp, which extends the shelf-life of the product. This process allows the company to spread product sales from periods with high avocado availability to periods in which avocados are less readily available, essentially smoothing out its revenue stream. During fiscal year 2011, the company’s five largest customers represented 9% of the division’s top line, while the largest 25 accounted for 17%.
The company’s reliance on agricultural products makes it subject to the vagaries of the growing process. Weather, in particular, can have a material impact on the top and bottom line, particularly in light of the fixed cost nature of Cavalo’s handling facilities. Regulation of the farming and food industries are also issues with which the company must contend. Failure to adhere to current regulations, or to adjust to new ones, would likely hamper results. However, the company could also be impacted by its growers’ abilities to maintain compliance, as well, since it is reliant on a healthy supply of the fruit.
It is also important to note that avocados and the other produce the company works with are commodities, and, thus, subject to supply and demand. The short shelf life of Cavalo’s products is also a consideration. Although this can lead to a constant level of demand, it can also hurt the company should demand dry up, leaving it with unsold goods.
Though a small company, Cavalo has grown in recent years through acquisition. A reasonable debt load makes this feasible, however further growth via this avenue could result in a material indebtedness and, possibly, managerial distraction. Both issues should be monitored as the company grows.
Subscribers interested in investing in a growing niche of the produce market should consult the most recent quarterly report for Calavo Growers, while keeping an eye out for supplemental research updates highlighting late-breaking news in-between regularly scheduled quarterly updates.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.