Fresh Del Monte: Strategies Are Working, But A Key Technical Level Has Been Reached (FDP)

Fresh Del Monte Produce (NYSE:FDP) has some good strategies to increase margins and to drive future growth. The company’s valuation is reasonable, which allows for more upside for the stock. However, the stock reached an important technical level, which could delay a continuation of the recent rally.

Fresh Del Monte Produce’s Business Background

Fresh Del Monte offers fresh and fresh-cut fruits and vegetables on a global scale. FDP operates under three segments: Fresh and Value-Added Products, Banana, and Other Products & Services. The Fresh and Value-Added Products segment comprises 61% of FDP’s net sales and 69% of gross profit. This segment offers pineapples, melons, avocados, vegetables, other various fruits, fresh-cut fruits and vegetables (including salads), and prepared foods and juices. The Banana segment comprises 34.5% of net sales and 26% of gross profit and obviously handles the sales of whole bananas. The Other Products & Services segment comprises 4.5% of net sales and 5% of gross profit. This segment includes FDP’s 3rd party freight and logistics services and the Jordanian poultry and meats business.

Fresh Del Monte sells its products under the following brand names: Del Monte, Rosy, UTC, Fruitini, Just Juice, Pinkglow, Honeyglow, Rubyglow, Nourish Bowls, and more. FDP markets and sells its products through a variety of retail/convenience stores, wholesalers, distributors, and foodservice operators. FDP obtains its goods from company-owned operations and from independent growers through supply contracts.

Growth Catalysts for Fresh Del Monte Produce

Fresh Del Monte Produce’s largest segment, Fresh and Value-Added Products, benefits from having higher margins than the other segments. This segment increased net sales by 2.4% while gross profit increased by over 25% in Q2 2024. Pineapples lead this segment as a growth driver. Fresh Del Monte is considered one of the global leaders in pineapples. FDP is projecting pineapple volume to increase by 3% annually over the next three years. The Fresh and Value-Added segment increased the gross margin [GM] to 11.2% in Q2 2024 as compared to the GM of 9.2% from Q2 2023.

FDP is working on optimizing operations in Japan. The gist of this strategy is to consolidate two facilities into one. The company plans to lower operational costs and increase the gross margin as part of this strategy.

Fresh Del Monte is completed the expansion of its Fresh Cut facility in the United Kingdom. The expansion drove operational efficiencies which led to a 60% year-over-year increase in gross margin for that market for Q2 2024.

FDP has been expanding its business with large customers in North America. The company achieved a 20% increase in business among five of the FDP’s largest customers year-to-date as compared to the same period in 2023.

Another strategy for FDP has been to increase its product line. This strategy led to new products such as: on-the-go oats, fresh, specialty fruits, and desserts. Fresh Del Monte has optimism for its fresh guacamole product. The company began testing for fresh guacamole in late 2023. The company sold 640 units initially during the test in November 2023. This increased to 315,000 units sold in under seven months. FDP expects to get its fresh guacamole into 3,000 stores by the end of summer 2024. FDP is one of the top avocado importers in the U.S. As a result, the company sees more expansion opportunities for this category in the future.

The company also implemented a program to convert its fruit residue from production into biofertilizer. FDP opened a biofertilizer plant in Kenya. This facility takes byproducts from FDP’s pineapple operations and converts it into biofertilizer. Fresh Del Monte plans on using the biofertilizer in its operations and to make it available to other growers in East Africa.

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Valuation

Fresh Del Monte is trading with a trailing PE ratio of 14.5x and a forward PE of 12.4x. This is below the Farm Products industry’s trailing PE of 17.3x and forward PE of 13x. FDP’s forward PE is based on analysts’ consensus expectations for EPS of $2.33 for 2024. FDP is trading at 11.5x expected EPS of $2.52 for 2025. FDP’s undervaluation leaves room for PE expansion as the company continues its growth.

FDP’s analyst consensus expected earnings growth is about 10% for 2024 and about 8% for 2025. These expectations look attainable as the company focuses on cost cutting, higher margin products, and operational efficiencies. The margin improvements from these efforts can help drive earnings to these expected levels.

For context, analysts expect the S&P 500 (SPY) to grow earnings at 10.1% for 2024 and 15.3% for 2025. This is about the same for FDP in 2024, but the S&P 500 companies have a higher expected growth rate for 2025. However, the S&P 500 is trading with a higher forward PE of 21x, which is higher than the 10-year average of 17.9.

It would probably be best to compare the PEG ratio to determine how Fresh Del Monte would fare against the broader market as measured by the S&P 500. The reason for this is to put the PE and the EPS growth rate into the equation as they differ among FDP and the S&P 500. FDP’s one-year PEG is 1.44 (PE of 11.5/2025 expected EPS growth of 8%). The S&P 500 has a one-year PEG of 1.37 (forward PE of 21/2025 EPS growth of 15.3%) which is just slightly below FDP’s PEG ratio. Since FDP’s PEG ratio is below the S&P 500’s PEG, the stock could lag the broader market. However, I wouldn’t expect the stock lag by much. Of course, it depends on how well FDP performs over the next year or so. If FDP exceeds expectations in most quarters, it could drive higher stock performance.

Fresh Del Monte Produce’s Technical Perspective

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FDP’s daily chart above shows that the stock moved into overbought territory as the RSI moved above 70. It is important to note that a bearish divergence exists as the price of the stock made a higher high in August while the RSI made a lower high. This set-up shows that profit taking may take place soon by large investors, leading to a pullback for the stock. That’s what I have observed with this formation between the stock price and the RSI in the companies and markets that I follow.

The blue MACD line (bottom of the chart) leveled off during August, while the histogram shows a decline in momentum as the vertical bars decreased in size. This confirms that the rally might be nearing an end and a pullback could take place soon.

The Risks for FDP

One key risk that could trigger a sell-off for the stock is the potential loss of FDP’s largest customer, Walmart (WMT). Walmart accounted for about 9% of FDPs total net sales in 2023. Losing Walmart as a customer would likely have a negative impact on FDP’s net sales and stock price. Also, the loss of other large customers would also have a negative impact on FDP.

Another risk is that profit margins can be volatile for the company’s produce due to fluctuating market prices. The market prices can be volatile for various reasons, such as supply/demand dynamics. Examples of this are higher labor costs and increased costs of fertilizer, fuel, packing materials, and freight costs which can narrow margins. The company may not be able to pass on all of the increased costs effectively, which can decrease margins.

The industry is highly competitive as FDP competes with large multinational companies and smaller importers and exporters. Increased competition can put downward pressure on prices and can take market share away from FDP, which can lower margins.

FDP’s products are highly perishable, which means that the products must be brought to markets and sold soon after harvesting. Since this process needs to happen on a timely basis, any disruptions to the supply chain can lead to a loss of potential sales.

Fresh Del Monte Produce’s Long-Term Outlook

Fresh Del Monte does have some solid strategies to increase margins and grow earnings over the next year. The valuation is reasonable and should allow for further price appreciation.

However, the stock is currently in an overbought condition from a technical perspective with a bearish divergence. So, I don’t think it is a great time to enter the stock, as a pullback could occur at any time. However, FDP does have an attractive valuation with expected earnings growth that could drive the price higher over the next year. So, I would rate the stock as a ‘HOLD’ for right now. Those who own the stock will reap the benefits of the 3.5% dividend yield. For those who don’t own the stock, I would watch for a pullback for a more attractive entry point.