Is Now the Time to Get Into This Stock?

Dole Pineapple Plantation

Dole Pineapple Plantation (Photo credit: Razak Abu Bakar)

Dole Food Company (NYSE: DOLE) presents an interesting opportunity for investors following its most recent announcements. The company delivered a news on May 28, the impact of which could be compared to that of a double-edged sword. It was both good and bad for investors. However, I tend to lean on the good side more, considering the company’s current position. Dole made two consecutive announcements sending its shares down, but this could yet again prove temporary.

In the press release, Dole revealed that it will acquire three new specially built refrigerated container ships for its U.S. West Coast operations, costing approximately $165 million, for phased delivery in the late 2015 to early 2016 time frame. The company expects to use the newly acquired container ships in a bid to update the company-owned vessel fleet.

Updating our West Coast shipping capabilities is very important strategically to the Company’s competitive differentiation and future growth prospects,” said C. Michael Carter, Dole’s President and Chief Operating Officer. “These ships will be 27 years old at the time of replacement. The new ships will be more fuel efficient and will be built to Dole’s exacting specifications and design, with a 770 FEU capacity (compared to the replaced ships with 491 FEU) and equipped with gantry cranes.

Consequently, Dole also announced the indefinite suspension of the share repurchase program of up to $200 million. The company announced the authorization of the share repurchase program barely three weeks ago (May 9). The premature announcement of the suspension is perhaps what triggered the stock’s sudden dive early morning on May 28.

At this time we have decided to use our existing funding resources to take advantage of this opportune window in the shipping industry, when these specialty ships can be built at very competitive costs,” said Carter. “While Dole is also seeking to monetize its excess Hawaii land holdings by actively marketing the approximately 20,600 acres of land that it is not currently farming on the island of Oahu, we do not expect that this land will provide a near-term source of liquidity given the magnitude of farmland involved. With the approximate $165 million investment in ships and the drag on earnings due to significant losses in our strawberry business, the share repurchase program is being suspended indefinitely.

Dole reports flat Q1 results

On May 2, Dole reported its Q1 earnings results with non-GAAP EPS of $0.12. The company beat analyst estimates on revenue of $1.05 billion compared to the consensus estimate of $1.03 billion. Nonetheless, this was a decline of 3% from last year following the company’s divestiture of its German ripening and distribution subsidiary. The company reported an income of $4 million from continuing operations, down from last year’s $26 million. Nonetheless, Dole’s COO Michael Carter believes that this won’t be a hindrance to the company’s target of $150 to $170 million for the financial year.

Carter said,

Dole’s first quarter performance is in line with our full-year expectations for 2013, at the low end of the guidance range of $150–$170 million. First quarter adjusted EBITDA from both of our remaining lines of business exceeded last year. Earnings grew in all of our core fresh fruit product lines. Fresh vegetables performance improved largely due to a turn-around in the fresh-packed product line.

Dole “Spins-off” packaged goods business to Itochu of Japan

On March 23,Dole struck a deal with Japanese company Itochu to sell its packaged goods business, and maintain its flagship businesses mainly concentrating on fresh fruit and vegetable products. This contributed to the detriment of the company’s GAAP earnings, which were down by $0.80 compared to the non-GAAP EPS. The company also revealed that at the end of Q1 it had a total debt of approximately $1.5 billion.

However, Dole received $1.7 billion from the sale of the packaging business, which will help streamline its capital structure. This would help the company improve its financial position while lowering its interest expense. During the earnings call, Dole also expressed that the company’s debt now stands at $440 million thanks to the new capital structure. Earlier in April, after the completion of the sale, Dole’s debt stood at $375 million, but has now shot up due to the E.U. Lawsuit, Yen Swaps, and Honduras tax settlement.

The new refrigerated container ships to boost sales

These standing obligations explain why the company had to suspend the share repurchase program indefinitely. It could not manage considering the purchase of the three new refrigerated container ships. This enhances the company’s strategy and growth prospects as it continues gain market share in a field dominated by Fresh Del Monte Produce (NYSE: FDP).

Additionally,Dole will also require seeing off the challenge of Chiquita Brands International(NYSE: CQB), a Charlotte, NC-based farm products company. The banana and packaged foods company has a market cap of $485 million, which is nearly half of Dole’s $921 million. Fresh Del Monte is, however, the biggest player with a market cap of $1.59 billion.

Sandwiched in the middle, and after having sold out a part of its business that saw it lose half of its size, Dole’s acquisition of the three container ships will play an integral part in its future. This is far better than if the money had been used in the share repurchase program. Additionally, the indefinite suspension means that the program could be resumed any time after Dole returns to a reasonable profitability zone.

Fresh Del Monte is the best company at the moment in terms of operating margins with 4%, while Chiquita’s stands at 1%, just a percentage point below Dole which has 2%. However, Chiquita beats Fresh Del Monte on gross margins at 11%, just a point above the Georgetown, KY-based company. Dole has the lowest with 9%. Nonetheless, the three are clearly underperforming compared to industry average of 14% in operating margin and 27% in gross margin.

Meanwhile, Chiquita’s restructuring plan seems to work the magic, with the company’s stock now up about 40%, but it is raising doubts as to whether the company will be able to sustain the program. On the other hand, Fresh Del Monte has struck a deal with corporate staffing and services company, Corporate Resources and Services, to outsource some of its operations. This is expected to help the Fresh fruits company curb its operational costs, hence improving profitability.

The bottom line

Following the assessment, there is a clear indication that Dole is probably at the very bottom. However, following the recent acquisition, and the sale of its packaged goods business unit, the company has set itself in what would appear to be a “troughing” zone.

With the huge debt gone and the potential for growth now set clear by acquiring the new container ships, there seems to be no better time to get in the boat. Additionally, we are also off from unfavorable seasons for a majority of its products, and we are now getting to a point the year when fresh cold juice would be a necessity. This is an opportunity to re-establish a sustainable rally going forward.

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