Sector financial performance:

This company, who primarily produces packaged fresh vegetables for retailers, has been grouped into packaged fresh vegetables sector in food industry.

It seems that the demand for packaged fresh vegetables has finally picked up in 2017 and 2018 (around 10% annual growth), as indicated by sales volume of some typical company in this sector.  If the supply shortage partially contributed to the decrease in sales volume before 2017, the supply seems to be meeting increasing demand but at the costs of smaller margins and decreased cash flow as a result of faster increase in costs than in price in process of increasing supply.

Our data indicates that companies’ gross margins (up to 15.5% in fiscal 2017 from 12.2% of 2014) have been improved with a products mix shifting to high margin products. but went down again in 2017 and 2018 (15%) due to increased labor and other costs.  And operating margins (2% 2018) have not gone up with gross margin due to the faster increased spending on SG&A% (10% 2018).  The operating income seems to be primarily determined by margins for companies in this sector in current situation.

According our analysis, companies’ enterprise price/adjusted EBI is around 72 with interest/EBITDA ratio of 20%. 

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Company performance:

It seems the demand from retailers for packaged fresh vegetables of this company has completely rebounded since the first quarter of 2017 (8-12% annually) after the demand had decreased by about 2-3% in the previous two years.  Accompanying with increased sales volume, sales also has been shifting to higher priced products.

For the first months of fiscal 2019 compared with same period of 2018(ended 20180826)

The sales of this company increased 8% primarily due to increase of 8% in sales of packaged fresh vegetables including 13% increase in sales volume.

For fiscal 2018 compared with 2017(ended 20180527)

The sales of this company increased 12% primarily due to increase of 12% in sales of packaged fresh vegetables including 9% increase in sales volume and higher price/product mix (salad products).

The sales of this company decreased 7% in the first three months of fiscal 2017 compared with the same period of 2016, primarily due to decrease of 12% in sales of export food offset by increase of 5% in packaged fresh vegetables.

The sales of this company decreased 2% in fiscal year ended May 28, 2017 compared with the same period previous year, primarily due to decrease of about 3% in sales volume of packaged fresh vegetables.

The sales of this company in packaged fresh vegetables decreased 2% in fiscal year ended May 29, 2016 compared with the same period of previous year, primarily due to significant decrease in sales volume offset by products mix shift to higher price products.

Gross margins increased from 12.2% of fiscal 2014 to 15.5% of fiscal 2017,primarily attributable a favourable products mix to high margin packaged vegetables products and as well to improved productivity, and then down to about 14.5% in 2018 with an about 10% SG&A/sales and about 2% operating margin. The decrease in margin since 2017 may be able to be attributable to increasing labor and distribution costs. Therefore, while increasing sales volume, we still see the shrinking cash flow from this company during this period due to increased costs.

Stock price

This stock currently has an enterprise price/EBI ratio of 73 ($15/share), which we think, is relatively slightly overvalued considering this company’s ability to control costs and market potentials.