3 Reasons FDP is Risky and 1 Stock to Buy Instead

Fresh Del Monte Produce has been treading water for the past six months, recording a small loss of 4% while holding steady at $32.60.

Is now the time to buy Fresh Del Monte Produce, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Fresh Del Monte Produce Will Underperform?

We're swiping left on Fresh Del Monte Produce for now. Here are three reasons why we avoid FDP and a stock we'd rather own.

1. Long-Term Revenue Growth Flatter Than a Pancake

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Fresh Del Monte Produce struggled to consistently increase demand as its $4.27 billion of sales for the trailing 12 months was close to its revenue three years ago. This was below our standards and is a sign of poor business quality.

2. Low Gross Margin Reveals Weak Structural Profitability

All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products, has a stronger brand, and commands pricing power.

Fresh Del Monte Produce has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 8.2% gross margin over the last two years. Said differently, for every $100 in revenue, a chunky $91.77 went towards paying for raw materials, production of goods, transportation, and distribution.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Fresh Del Monte Produce historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.3%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+.

Final Judgment

Fresh Del Monte Produce doesn’t pass our quality test. That said, the stock currently trades at 8.1× forward EV-to-EBITDA (or $32.60 per share). This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there. Let us point you toward one of Charlie Munger’s all-time favorite businesses.

Stocks We Would Buy Instead of Fresh Del Monte Produce

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