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Betting on This Turnaround With Nearly 40% Upside Potential

Saturday - 4/27/2013, 4:21pm  ET

Since the beginning of the year, Chiquita Brands International has experienced some volatility. Its stock price dropped from $8.25 per share to only $6.10 per share in March 4, then it bounced back to more than $7.20 at the time of writing.

Interestingly, in the middle of March, Chiquita’s president and CEO purchased 50,800 shares of the company at an average price of $7.86 per share. Chiquita is also in the portfolios of several successful investment managers, including Paul Tudor Jones, Steven Cohen and Jim Simons as of the end of 2012.. Should investors consider Chiquita a buy at its current price?

Business snapshot

Chiquita, originally incorporated in 1899, is one of the leading international distributors of bananas and other fresh produce under its namesake brand in around 70 countries. It also distributes Fresh Express packaged salads.

U.S. Chiquita operates in three main business segments: bananas, salads and healthy snacks, and other produce.

In 2012, 66% of total revenue, or approximately $1.9 billion, was generated from the bananas segment while salads and healthy snacks contributed around $953 million in sales. Other produce only brought $140 million in revenue.

Out of the three divisions, only the bananas segment was profitable. It produced 2012 operating income of $77 million, whereas the salads and healthy snacks and other produce segments generated losses of $218 million and $18 million, respectively.

The loss in the salads and healthy snacks segment in 2012 was mainly due to a goodwill and an impairment charge of $180 million relating to Fresh Express. In 2012, Chiquita’s net loss came in at -$405 million, or -$8.79 EPS. However, the operating cash flow stayed positive at $33 million.

High leverage with huge goodwill and intangibles

What makes investors more worried is the company's overly-leveraged capital structure. As of last December, it had $370 million in total stockholders’ equity, $51 million in cash and more than $600 million in both long-term and short-term debt.

However, the company has refinanced to move most of its debt maturities to the year 2021. Furthermore, Chiquita booked as much as $540 million in both goodwill and intangible assets. Consequently, its tangible book value was negative at -$170 million.

New CEO with the restructuring effort

Recently, new CEO Edward Lonergan has positioned the company to be a low- cost producer with business restructuring and cost reduction. He set the margin target at 4% for the bananas segment while the profit margin target salads was around 7% to 8%.

EBITDA might rise to $175 million, much higher than the $59 million achieved last year. Lonergan commented that he has seen the results he expected from the restructuring. He said:

“We'll continue to drive cost out of the value chain to leverage the velocity of advantages of our brands with the right value proposition to the customer and the consumer. We did a lot of pairing in 2012 and while we have a few more businesses to exit in 2013, we do not expect that to be accompanied by material cash outlay."

Peer comparison

At $7.20 per share, Chiquita is worth $336.4 million in market capitalization. The market does not seem to value the company cheaply, at about 12.5 times EV/EBITDA. Compared to its peers, including Dole Food and Fresh Del Monte Produce , Chiquita’s valuation stays in between.

Dole Food, with a long history dating back to 1851, is a global leading producer and distributor of fresh fruit and fresh vegetables. It operates in two business segments, including fresh fruit and fresh vegetables. The fresh-fruit segment generated $3.1 billion in revenue, while the fresh vegetable segment had more than $1.1 billion in revenue.

Recently, the company completed its $1.7 billion sale of the packaged-foods segment to Itochu. After the sale, Dole expects to have a much stronger balance sheet with a post-transaction net debt/ adjusted 2013 EBITDA of around 2.5. As a result, Dole will benefit greatly from the huge reduction in the interest expense.

Moreover, the company has recently set the rate for refinancing its loans of around $625 million. These loans, due in seven years, will pay interest at around 3% to about 3.2% more than the LIBOR rate. 

At $10.40 per share, Dole Food is worth $922.8 million in market capitalization. The market values Dole Food at as much as 20.6 times EV/EBITDA. Even with a much stronger balance sheet, a recent high EV multiple might restrain investors from initiating a long position in Dole Food at its current price. 

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