Mission Produce: Not Ripe For A Position

When Mission Produce (NASDAQ:AVO) traded around a high of $20 in May 2021, I concluded that the business was on a mission. Shares had done well since the business went public in the fall of 2020, despite fears about price declines and the resulting impact on margins.

Secular volume trends remain strong and while I liked the strong margin dynamic, it seemed as if investors had priced in strong margins for an extensive period of time, making me a bit cautious. This caution served me well, as a current downturn leaves Mission to post (substantial) losses, all while debt is building up, making me quite frankly quite cautious here.

Avocado Play

Mission Produce is a key player in the sourcing, production and distribution of fresh avocados to a variety of demand channels. Other services provided by the business includes ripening, packing and logistics.

The company has thousands of acres of production capacity in Peru and with 4 decades of operations, the company focused on avocados long before they became the hype as they did in recent years. Production in Mexico and California has been growing as well, with third party growers ensuring supply across all seasons.

Pre-pandemic, the company processed half a billion pounds in 2019, a number which tripled during the ten-year period before, making up a fifth of the U.S. market. Prices hovered between $2 and $3 per pound, with the status of superfood and healthy alternative driving demand.

In the fall of 2020 shares went public at $12, granting the company a $830 million equity valuation, although this number excludes a modest net debt load of $60 million. This was applied to a business which generated $860 million in sales (for the year ending October 2018) on which operating profits of just $19 million were reported.

Revenues rose to $883 million in 2019, and while sales were largely similar, prices were up nearly 20%, offset by nearly similar volume declines. This resulted in operating profits booming to $106 million, with pro forma earnings seen at $1.20 per share, as the swings were a testament to the cyclicality of margins.

For the first three quarters of 2020, volumes were up 8%, yet sales rose just a percent, indicating some margin pressure ahead of the IPO. Operating profits were trending at $60 million, for realistic earning of $45 million, or $0.65 per share. The cyclicality of the margins and plenty of environmental, political and weather risks made me a bit cautious.

Soon after the IPO, shares rallied to the $20 mark as the company posted adjusted earnings of $0.86 per share for 2020, stronger than anticipated. As the company saw volumes up, but prices down in 2023, this was not an encouraging outlook for earnings to do well in 2021, leaving me to conclude that I lost appetite.

Expectations Come Down

After trading around the $20 mark for most of 2021, shares have largely hovered around the $15 mark in 2022 as shares moved lower again in 2023, now trading near their lows at $9 per share. This makes that shares are cut in half from the spring of 2021.

In the year the company posted 2021 sales of $892 million on which a $61 million operating profit, equal to $0.63 per share was reported. Revenues rose to $1.05 billion in 2022 as the composition of growth (higher volumes and lower prices) made that a $37 million operating loss was reported, and a mere $12 million profit if we add back a near $50 million impairment charge. Losses were in part the reason why net debt rose to $90 million.

Moreover, the company guided for similar supply/demand dynamics into 2023, that is higher volumes and lower pricing, not boding well for the results.

In March, Mission reported a 1% fall in first quarter sales to $213 million, but with volumes up 14% that shows pressure on margins. Nonetheless, a $10 million operating losses actually improved from the same period in 2022. The sales results are a bit misleading as the company posted nearly $30 million in third-party blueberry sales versus no such contribution in 2022.

Second quarter sales fell 21% to $221 million as avocado volumes rose, prices fell, but blueberry sales came in at less than $2 million. An operating loss of $1 million and change was fairly stable compared to the same period last year, when in fact a profit of around a million was reported.

In September, third quarter sales were down 17% to $261 million on the back of the same dynamics are referred to above, as operating profits of $11 million were cut in half from the period before, as blueberries generated just over a million in sales. The losses made that net debt ticked up to nearly $150 million, somewhat of a concern as EBITDA only totaled $31 million for the first nine months of the year, with interest expenses increasing quite rapidly here. That however did not deter the board from announcing a $20 million buyback program

Fortunately, the company sees some kind of stabilization in the supply-demand dynamics with pricing expected to show sequential improvements, partly because of less own production and general supply, although the impact of all of this remains to be seen in the upcoming fourth quarter.

And Now?

Quite frankly, there is something to like about Mission Produce, and that is a dominant position in a long-term growing avocado market. The issue with Mission Produce, Inc. is that, despite its dominant market position, the business is still largely a commodity play here, as is evident by the current losses reported.

Besides these supply-demand dynamics, the company is susceptible to a lot of other impacts relating to weather and political interference, as quite frankly investing in such commodity play is not my cup of tea.

Moreover, the company has incurred some debt, which is never a desirable trait for such volatile operations, as the diversification into blueberries yet has to pay off. While margins will undoubtedly normalize somehow, the question is if the average margins through the cycle are compelling enough to create appeal based on the current valuations.

If you like to see more ideas, please subscribe to the premium service "Value in Corporate Events" here and try the free trial. In this service we cover major earnings events, M&A, IPOs and other significant corporate events with actionable ideas. Furthermore, we provide coverage of situations and names on request!