Saturday, January 27, 2007

Chiquita Brands Incorporated – Attractive free cash flow yields but be careful not to slip on the peel….

I have added Chiquita Brands Incorporated (CQB) to my portfolio on Jan 25th, 2007 at a price of $15.66 per share driven by the risk/reward proposition at these price levels.

Here are the main reasons I like to stock, in order of significance:
- Employing acquisition strategy to diversify product portfolio into high profit margin businesses - Free cash flow yield of 10.8% on a trailing twelve month basis for 2006, and 20.1% in 2005
- Cash per share of $2.46 or 15.5% of current market cap
- Price to Book Value of 0.6 times
- Well recognized brand equity & quality
- Spinach scare puts equity into an oversold position

Keep a close eye on these items that might make you slip on their peel:
- The dividend has just been cut to pay down some of the current debt
- A few legal proceedings involving management and the federal agencies
- Atlanta AG goodwill analysis not yet finalized
- Continued weakness in bananas segment due to EU Regime law of banana imports

Company Overview
Chiquita Brands International, Inc. and its subsidiaries operate as a leading international marketer and distributor of bananas and other fresh produce sold under the “Chiquita” and other brand names in approximately 70 countries and packaged salads sold under the “Fresh Express” brand primarily in the United States. The company also distributes and markets fresh-cut fruit and other branded, value-added fruit products. The company produces approximately 30% of the bananas it markets on its own farms, and purchases the remainder of the bananas, all of the lettuce and substantially all of the other fresh produce from third-party suppliers throughout the world.

5 Year Financial Trends
For the 5 year period of 2002 to 2006(TTM), CQB has achieved a revenue compounded growth rates of 21.5%, with annual growth in double digits for the last 4 years. Net Income growth has not been as consistent as the topline, going from a loss of $(384) million in 2002 to a profit of $23.7 million in 2006 (TTM).

Stock performance
If you invested $10,000 on Jan 2nd, 2002 in CQB common stock, your portfolio balance would be worth $15,946 or an 8.1% annual return, ~2.1x higher than the S&P 500 of 3.8%. The equity has achieved most of the increase in 2002 and 2003, booking a negative return from 2003-2007 YTD.

Value scorecard
CQB has an average value scorecard capturing a passing mark on 4 of the 8 indicators. The strongest of the passing grades is within the free cash flow yield section, coming in at 10.8%. Of the 4 failing marks; Section F. (Liabilities to Book value) and Section B. (Annual Net Income Growth) are the sections that I am slightly concerned with.... I will be monitoring this stock very closely.

Growth Potential
My current valuation model is resulting with the common equity of CQB to be valued at a market cap of $891 Million or $21.56 per share.
Here are my assumptions:
- Sales Forecast with a 2006-2011 CAGR of 5.0%/
- WACC of 6.1%
- Perpetuity Rate of 0%
- Free Cash Flow as a % to Sales of 2%
- Cash of $101.6 Million from Q3 2006
- Total Debt of $978.0 Million

Here is the sensitivity chart on annual sales increase per year vs. the FCF% to NTS

Additional blog postings on CQB can be found at the Value Discipline blog.

Author disclosure: I currently own shares of CQB.

Company website link
Yahoo finance
SEC on-line 10-K and 10-Q reports


Anonymous said...

Elias . To recommend CQB and not WVVI seems to be the hight of naivete! It's like recommending a client to play roulette but refusing to allow the same client to investing in a casino at a reasonable market price . Don't allow a promising investment but do recommend a complete speculation in CQB common because your quantitative model says slight discount's absurd and your comparative results will no doubt demonstrate it. Regards, Tom

ETStockideas said...

Tom -
Thanks for the comments. To clarify for all of my readers, these posts serve as documentation of my analysis on what and why I am adding a certain equity to my personal portfolio. I recommend every reader/investor to do their own due diligence.