Calavo Growers, Inc Rebound Is Blossoming

Record Volume Sales For Calavo Growers

We started getting interested in Calavo Growers NASDAQ: CVGW during the fourth quarter of 2020. The company was not immune to the pandemic but underlying trends within the business pointed to fundamental strength in the face of an expected economic rebound. While revenues shrank during the pandemic it was not because of volume sales. Sales of avocados reached new highs during the past year and promise to drive substantial revenue growth over the next year. 

The reason why revenue shrank is more to do with an overabundance of avocados related to declining Food Service demand and a great harvest out of Mexico, an overabundance that led to lower selling prices. Now, more than a year into the pandemic, the reopening is well underway, and improving Food Service demand has Calavo Growers revenue back to pre-pandemic levels with growth expected in the coming quarters.

“We are indeed seeing positive signs as the economy reopens and we are pleased with our recovery, which is driving our long-term optimism. For the first half of 2021, we recorded the highest avocado volume in the last five years—reflecting growing consumer demand across all our end markets,” said James E. Gibson, CEO of Calavo Growers.

Calavo Growers Revenue Returns To Pre-Pandemic Level

Calavo Growers second-quarter revenue came in at $276.8 million. This is at the high end of the guidance and a hair below the pre-pandemic level. On a YoY basis, revenue was down 1.5% but, once again, it's due to realized prices, not volume sales and this is not an easy comp.  the prior-year Q2 included 6 weeks of pre-pandemic business. Looking forward, prices for avocados and tomatoes should creep higher over the next several quarters as food service demand re-stabilizes and drive a substantial improvement in revenue. Sequentially the revenue is up 25% from the previous quarter but down 3.5% on a two-year basis.

On a segment basis, the fresh segment, which is the largest operating segment by far, saw its revenue decline 5%. This is due to a 9% increase in avocado volume offset by a 10% decrease in avocado prices and 31% less revenue from tomatoes. The Renaissance Food Group segment and Food segment, which focus more on prepared and pre-packaged foods, saw revenue growth of 3% and 16% year-over-year respectively.

Moving down to the income section the company's gross profit came in at 8.2% of revenue compared to 7.9% of revenue last year. The increase in margin is due to volume growth in the fresh segment, offset by price declines, as well as internal controls. The results get even better as we reach the bottom line where the GAAP and adjusted income both improved over the last year. The GAAP income of $0.50 per share reverses a $0.19 per share loss while the adjusted $0.43 cents is up 7.5% in evidence of the company's earnings leverage. 

Looking forward, the guidance is good as well. The only thing we can fault it for is that it is only in line with the consensus estimate. Looking beyond that, the company is expecting 1% to 8% sequential revenue growth with a 40% uptick in sequential earnings. More importantly, the company is expecting 3.7% YoY growth at the low end of the range and we think that's a cautious estimate.

Calavo Growers Has A Fortress Balance Sheet And Pays A Dividend

Calavo Growers had a fortress balance sheet before the pandemic set in and has only improved that position in the time since. Debt levels remain incredibly low while cash and cash equivalents are up 30% even with the addition of new businesses. The company's cash flow is also fueling a dividend worth about 1.1% with share prices near $74 and this is a safe payout. The company distributes profits annually and has been Increasing the distribution annually for almost a decade. The only negative we see is the payout ratio which is running about 55% of the current consensus. Based on the Q2 results, the Q3 outlook, and the forecast for avocado demand and prices we see this figure coming down to a much more manageable level as soon as the third quarter. The takeaway is that investors can rely on the payout and should expect it to be increased for the tenth consecutive time this year.

The Technical Outlook: Calavo Growers Is Ripe For Reversal

The price action in Calavo Growers was a little volatile following the Q to release but the bulls appear to be winning. At present, it appears as if shares of CVGW are bottoming and on the verge of a reversal. There is a chance the market will retest support in the $70 to $72.50 range but, other than that, we are looking for a break above the short-term moving average. A move above the 30-day EMA would confirm the reversal and bring price targets in the $80 to $85 range into play.