Demand for lemon has been strong and the sales volume of lemon has been increasing in the past four years accompanied by deflation of price. As sale volume increased, companies’ margin and profitability were improved significantly.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• Sales volume of fresh lemon has increased largely in the past several years; sales volume of Californian sourced avocado went down in past two years after an increase of 51% from previous year.
• Behind the increasing sales of lemon and avocado was the continued decrease in price. However, we have seen a rising price accompanying rising volume in 2018.
• Profitability of companies was significantly improved when sales increased.
• Lemon growers have tried to take advantage of economy scale as a way to save costs and improve profitability such as packing costs.

 

Causes behind the trend

• While there is no evidence to show that fundamental changes have been behind the increase in demand for lemon, the deflation of price in lemon and economy elastic of price may contribute to the increase in sales volume.
• Companies’ margins and profitability in this sector are extremely sensitive to changes in sales since fixed costs account for a very large percentage of total costs. This is why companies’ operating and cash inflow fluctuated in +/- 100% range as sales went up and down.

 

Industry Future

• Gradually increasing population and accelerated recovery of economy form a foundation to support growth in demand for lemon and avocado.
• As price continues to go down and sales volumes go up, economic elasticity of price may reach some point where economic elasticity is so small that further lowering price will give a negative impact on the total sales when volumes stop going up. If that happens, lemons growers may reduce their supply and push the price to go up again. The resulted decrease in sales may then jeopardize companies’ profitability. However, it is also possible that the strong growth in demand will still not be able to meet by supply in next few of years.
• Considering price significantly influences sales of lemon and thus profitability, how to lower production costs and selling costs to keep price at current or even lower level may be the key for this sector to maintain its growth in sales and also profitability.

General Financial Performance of Companies In the Sector

As our data indicates that the sales volume of fresh lemon has been growing at average 9% annual growth in the past several years. While the increase in sales volume for lemon was accompanied by deflation of price before 2017, we think the growth in sales volume has been supported by strong demand, which resulted in higher sales volume and price in 2018.

Because this is a typical sector where fixed costs usually account for a significant percentage of total costs, the increase in sales volume in the past several years seems to play more significant role in improving companies’ margin and as well profitability than changes in price do, which seems to be determined by temporary market  imbalance of supply and demand.  

Our data indicates that companies in this sector usually have about 23% gross margins and 11% operating margins in 2018.

According our analysis, companies’ enterprise price/adjusted EBI is around 57 with interest/EBITDA ratio of 7%. 

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