Description

LONG: Dole Plc (NYSE: DOLE)

Dole is one of the world’s largest producers of fresh bananas and pineapples. They also distribute a wide variety of locally grown and imported fruits to over 75 countries. Today’s Dole is the result of a merger between Total Produce Plc and Dole Food Company (“Legacy Dole”). The combined entity went public in late July 2021 at $16 per share. The stock peaked near $17 in September 2021 then took a harrowing 57% decline to $7.30 a year later, triggered by disastrous results in their vegetable division. They just sold this segment for an excellent price. Dole’s stock price has since recovered to $11 as of this writing; it is still woefully undervalued, underestimated, and unwanted. A ripe opportunity, pun intended.

Having offloaded the big problem, Dole has multiple potential drivers for higher-than-consensus profits in 2023. Debt paydowns from the proceeds will also bring them below their leverage target for the first time since near the IPO, teeing up potential buybacks while trading at a dramatic discount to a very close peer, Fresh del Monte. Dole also trades 13% below book value. It could have 100% upside, and numerous catalysts prevent a value trap in a low return industry.

Why does this opportunity exist?

The stock price decline tracked extreme deterioration of the bagged salads business, within the “fresh vegetable” division. Analysts estimate that Dole’s EBITDA will have fallen from $372 million in 2020 to $332 in 2022. The $40 million dollar fall consists of a $71 million decline in fresh vegetables EBITDA (to a significant loss of about $30 million), offset by a $31 million increase for the rest of the business. This sent estimates and the stock price down. Just about everything that could go wrong for fresh vegetables did:

• A recall in late 2021, driven by listeria contamination traced to a piece of harvest equipment.
• A severe combination of heat, rain, and disease in the lettuce growing regions of California, leading to crop failure in late 2022.
• Labor availability challenges.
• High inland freight costs.
• Savvy competition from a private competitor, Taylor Farms, who automated production and has superior sourcing.

And yet Dole announced on January 31 of this year they would sell the whole vegetable division to Chiquita for $293 million, over 10% of TEV for a money losing business. This is a higher multiple for their worst asset, at its peak profit, than all of Dole gets in the market today.

The consensus estimate for 2023 EBITDA excluding vegetables is $354 million. At 7.4x EV/EBITDA, (again the peak profit multiple of its worst asset), the rest of Dole would be worth $2.6 billion. With PF debt of $815 million after sale proceeds, the equity would be worth $1.8 billion, $19 per share, or 70% upside. Close peer FDP trades at 8.4x, getting Dole to 104% upside. At 9x, the multiple where Total Produce had the option to acquire the majority share of Legacy Dole in 2018, there is 124% upside. And we haven’t even beat consensus yet. More on that later.

Comparison to Fresh del Monte (“FDP”)

Just how comparable are FDP, trading at 8.4x, and DOLE, trading at 5.3x PF 2023?

FDP describes itself, in almost perfect parallel to DOLE, as one of the world’s largest producers of bananas and pineapples while dabbling in the sale of other fruits. ROA is higher for Dole, but both are in single digits. Gross margins are very similar:

Assets are similar too. When Total Produce bought 45% of Legacy Dole in 2018, they neatly summarized the assets into five categories which we update for today’s quantities:

• 114,000 owned acres
• 13 ocean transport vessels
• 75+ packing houses
• 12+ cold storage facilities
• 5 salad manufacturing plants (just sold to Chiquita)

Add over 160 distribution sites from legacy Total Produce to the list.

And FDP lists similar assets including owned acres of productive land, a vessel fleet, packing facilities and so on. Here is a side-by-side comparison of the quantities:

These businesses are extremely similar in nature, yet Dole is only worth 7% more than FDP despite 80% more sales, 50% more EBITDA, 91% more owned acres, 12% more acres in the primary source country, 34% more tangible assets, more facilities, more containers, etc. Dole even has greater returns on assets. Either Dole is undervalued, or FDP is overvalued.

If it turns out FDP is overvalued, Dole is still trading 13% below book value. Numerous asset sales are occurring close to or above book, including the vegetable division and ongoing sales of acreage in Oahu. Furthermore, Legacy Dole by itself was worth $1.35 billion TEV in a management buyout back in 2013. Total Produce was at one point worth $1 billion by itself, just before buying their 45% stake in Dole. These facts point to Dole being cheap and FDP representing upside, rather than vice versa.

Getting Above Consensus Profits

Consensus EBITDA for Dole in 2023 is $363 million, before the close of the vegetable sale. Street models have the veggie business earning anywhere from zero to over $30 million with a mean of $9. Thus, we think consensus for PF EBITDA is about $354, $363 less $9. This is a decline from 2022 despite no fewer than three big cost headwinds that are becoming tailwinds indicating that no high paid sell-side analyst is paying attention. Commodity prices are also favorable.

EBITDA ex-veggie will have declined from $394 to an estimated $364 in 2022. The business was hit by bunker fuel, FX translation, and packaging costs. All three are becoming tailwinds as we write. Disclosures say that a 10% fall in bunker fuel would lower costs by $16.4 million. It is on track to decline by a high teen percentage this year. Containerboard for packaging has an identical sensitivity disclosure. It is set to be down a few percent right now. Experts have encouraged us to downplay these profit tailwinds due to changes in pass through structures, but they should still be at least some help to profits given the magnitude. FX translation is cited as the primary driver of a $14 million YTD decline in EBITDA for the business outside North America. We think the Euro can claw back some fraction of that this year.

To boot, both banana and pineapple prices are on track to increase over last year’s averages. With distracting problems in the vegetable business, Dole also hasn’t realized all of the $30-40 million of synergies they originally expected from the merger. The only headwind we can foresee is the reversal of profit increases from backhauling on their ocean fleet. This should be smaller than the collective tailwinds. Overall, we think the earnings bridge to 2023 EBITDA should look something like this, around $390 versus consensus at $354:

To support our case, the original guide for 2022 EBITDA was $375-380 million, in the throes of a product recall and accelerating cost inflation.

$390M should translate into EPS of roughly $1.47 vs. consensus of $1.12, for a 7.6x forward PE.

Obviously, we’re talking about an agriculture business, so precise estimates deserve a grain of salt. But there is room for things to go wrong and simply match earnings expectations at, another pun, a dirt-cheap valuation.

Capital Allocation and Shareholder Friendly Optionality

Because the vegetable business is losing money, its sale brings the ratio of Net Debt / TTM EBITDA from 3.3x to 2.3x, below management’s 3x target for the first time since their first earnings call for the quarter ended 9/30/21. Management hesitated to commit to buybacks at that time, because they had just issued equity near the trading price. But the stock is now 1/3^rd below that level and the relative valuation against peers is ridiculous. They will also get a seasonal capital unwind typical of the 4^th quarter. The odds of initiating a buyback are higher than ever.

Downside Protection

While we touched on each of these points briefly, it’s worth reiterating them together: DOLE’s downside is protected by both valuation and earnings forecast observations. First and foremost, DOLE trades 13% below book value. Book value in the ag business is as real as it gets, with thousands of acres of productive farmland, a fleet of highly utilized ocean vessels, and other distribution assets that collectively distributes more fresh produce than any organization in the world. The 18% of book assets in intangibles includes one of the most globally recognized food brands. Their worst asset, vegetables, was sold for a great price. DOLE is also consistently selling land in Oahu at or above book value as shown in this table.

Put together, we think book value is a much better indicator of value for DOLE than most businesses today. The lowest price to book ratio they’ve ever traded at is only 26% lower than today’s price.

Precedent transactions also provide support. The 2013 management buyout of legacy DOLE for $1.2 billion was deemed undervalued by a Delaware judge in a shareholder lawsuit. David Murdock, who owns 15% of DOLE today, was ordered to pay another $148.2 million to the shareholders of record nine years ago.

Total Produce was a growing business in its own right before their 2018 minority investment in DOLE and the eventual merger. It had an average enterprise value of 847 million EUR in 2017 before those transactions, or about $950M USD. Put together, the Legacy Dole buyout and legacy Total Produce less vegetable division add up to exactly the $2.0 billion in enterprise value DOLE fetches today. This protects the downside too.

From an earnings perspective, we mentioned that the core business pro forma vegetable sale is expected to decline. In a business as volatile as agriculture, we take some comfort in how much has already gone wrong to depress expectations and sentiment. Even outside veggies, bunker fuel, the strong dollar, packaging, inland freight, Honduran hurricanes, and even a strange demurrage charge in Chile have all taken shots at results in the very recent past. For things to get worse would be remarkable.

Wrap Up

Agriculture is a lousy business: high capital intensity, low margins, input cost volatility, price volatility, no correlation between prices and costs, flat demand, random beat downs from Mother Nature, and no alternative use of the assets in a liquidation. But some bad businesses exist for a durable reason, in this case that people need to eat. Literally nothing is more durable than that. You make money on a business like this when it clearly deserves to exist long term, is solvent, a torrent of bad news sent investors through the exits, enterprise value falls below invested capital, estimates fall, catalysts exist to correct the price, insiders are large partners, and management is candidly working out the issues. All these conditions are present.

We think Dole is worth $22 per share, almost double today’s price, or 7.5x our 2023 EBITDA estimate of $390 million and 15x our 2023 EPS of $1.47. This would still be a turn cheaper than FDP. It is catalyzed by a crystal clear comparable, cost tailwinds, and potential for favorable guidance and capital allocation announcements. It also pays a 3% dividend.

Catalyst

• 2023 EBITDA guidance.
• 2023 EBITDA results.
• Buyback initiation.
• Costs keep deflating.

Risks

• Lina Khan blocks a salad deal.
• Crop or harvest problems.
• Resurgence of cost items like fuel, packaging, etc.
• Management sets a low bar with guidance.