Growth Play on Guacamole? Buy the Avocado Seller, Not the Taco Chain
The earnings from Chipotle Mexican Grill (CMG), the restaurant chain that gave consumers a voracious appetite for fast food with fresh ingredients, seem to get better every quarter.
But prospects for would-be investors in this company just get worse and worse. Buyers keep ramping up the share price, making Chipotle one of the most expensive restaurant groups out there.
YCharts Pro says even Chipotle’s stellar growth doesn’t justify its current share price.
Here’s a cheaper way to cash in on the popularity of fresh guacamole and custom salsa: buy the company that supplies the ingredients.
Calavos Growers (CVGW) is a small but fast growing company that supplies more avocados and avocado products to wholesalers, supermarkets and restaurants than any other business. It also sells papayas, tomatoes, pineapples and products such as salsas prepared with those ingredients.
In recent years, Calavo has built a solid balance sheet while quickly pushing up revenues and earnings. This history, paired with low current valuations on the share price, have led YCharts Pro to tag Calavo an attractive investment under the heading “Growth at a Reasonable Price.” Calavo’s plans to make a lot of acquisitions make it an even better growth play.
Calavo’s growth in comparable to Chipotle.
But that growth comes at about one third the price, based on p/e ratios of the two companies.
Calavo doesn’t grow produce, but it buys fresh fruits and vegetables from growers throughout the U.S. and South America. Calavo’s sales of avocados alone grew 119% in fiscal year 2010. Earnings growth generally kept pace.
Calavo management has been touting plans to aggressively pursue acquisitions. The chief executive wants to see $1 billion in annual revenues; last year it had $398 million.
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Investors seemed to find this plan more feasible before the company announced its first quarter earnings in March. After boasting about record profit margins and cash flow just three months earlier, both showed hits in the most recent report.
Cash flow turned negative.
Management put the blame mainly on a temporary disruption in production when it closed a manufacturing plant for upgrades. Not satisfied with this explanation, Calavo investors have taken down the share price about 15% since then.
But industry groups report that U.S. demand for avocados remains very strong, and Calavo management hasn’t wavered in its plans to buy up a lot of competitors. Despite last month’s numbers, the company still has the fundamentals to pull off these acquisitions. Calavo has very little debt. Expenses appear under control.
Calavo looks worth a bet that it can handle whatever problem hit its profit margins last quarter. Management has a solid track record of turning rising earnings out of the business. Growth both in-house and through acquisitions looks certain. The shares are trading at a reasonable 16 or 17 times earnings, and a current dividend yield of 2.7% makes them more of a bargain.
Calavo isn’t likely to give shareholders a 300% gain in two years the way Chipotle did. But at these prices, Chipolte isn’t going to do that again for today’s buyers either. For growth on the back of fresh avocados and tomatoes, Calavo's the better choice.
Filed under: Company Analysis