Sector financial performance:

This company, who primarily grows and distributes fresh banana and pineapples and produces fresh-cut fruits, has been grouped into bananas producers and distributors sector in food industry.

It seems that the demand for banana has been stable and presented apparent economy elasticity related to changes in price, which seems to be determined by industry supply. Increased supply and reduced supply of banana seem to follow by each other and form a cycle with increased industry supply- decreased price and increased sales volume or decreased supply – raised price and decreased volumes. Due to an upward trend in price probably resulted from increasingly tight industry supple, the sales volume of banana seem to have been decreasing generally since 2015.

Because the company in this sector usually grows a significant portion of its major distributed products by itself, it presents more characteristics as a fruit farm than a distributor in terms of its financial performance, which are that its margin often went down when there were increased supply and fallen price and went up when supply decreased and price rise. Therefore, we see companies’ margins decreased when banana’s selling price decreased in 2015 and 2017 but increase when banana’s selling price increased in 2016. Unexpected increase in distribution costs significantly hurt companies’ profitability in 2018 while rising selling price of banana. Changes in companies’ operating income follow the same pattern as margins’ probably because the economy elasticity of banana is currently at a level where the decrease in profits resulted from decreased volume due to increased price has not yet been offset the increase in profits resulted from the higher margin due to higher price.

 A typical gross margin is 7% and a typical operating margin is 2.5% in 2018 but fluctuating in the cycle of supply and price.

According our analysis, companies’ enterprise price/adjusted EBI is around 32 with interest/EBITDA ratio of 10%. 

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Company performance:

This company has experienced increase/decrease of supply in banana worldwide market between 2015 and 2017 and therefore the sales volume, margins, and profits of banana fluctuated with changes in industry supply and the changes present a typical farm pattern probably because this company is buying about half of its bananas from its own farms. Worldwide demand for banana seems to be declining as indicated by sales volume. However, sales volume for fresh cut vegetable and fruit continued to grow.  

For the first nine months of fiscal 2018 compared with 2017 (ended 20180928)

The net sales of this company increased about 10%, primarily attributable to increase of 22% in sales of fresh-cut fruits and other fruits and offset by decrease of 3.5% in banana (volume down by 6%)

For fiscal 2017 compared with 2016

The net sales of this company increased about 2%, primarily attributable to increase of 8% in sales of fresh-cut fruits and other fruits and offset by decrease of 2% in banana (volume down by 1%).

The net sales of this company increased 3.5% in the first six months of fiscal 2017 compared with the same period of 2016, primarily attributable to increase of 5% in sales of fresh-cut fruits and other fruits and offset by decrease in banana and prepared foods. (Banana sales volume increased 2%).

The net sales of this company decreased 1% in fiscal 2016 compared with the same period of 2015, primarily attributable to decrease of 3% in sales of banana and offset by increase in sales of other fresh-cut fruits. (Bananas’ sale volume decreased by 4 %.)

The organic net sales (excluding currency impacts) of this company increased more than 6% in fiscal 2015 compared with the same period of 2014, primarily attributable to increase in sales of fresh-cut fruits and increase of 3.5% in banana. (Bananas’ sales volume increased by 7 %.)

Gross margin decreased from 9.3% of fiscal 2014 to 8.4% of 2015 partially due to decreased selling price of banana resulted from increased supply. (Gross margin for banana down from 6% to 4%).  Gross margin Increased from 8.4% of fiscal 2015 to 11.5% of 2016 partially due to increased selling price and lowered costs of banana. (Gross margin for banana up from 4% to 9%).  Gross margin decreased from 13.5% of first half of fiscal 2016 to 10% of the same period of fiscal 2017 partially due to decreased selling price of banana resulted from increased supply. (gross margin for banana down from 12% to 10%).  Gross margin decreased by about 160 basis points to about 7% in 2018 partially due to faster increase in costs of distribution costs than increase in selling price of banana and decrease in sales volume. (gross margin for banana down from 10% to 7%). 

This company’s operating income and cash flow went up and down in a wide range following the changes in margins (operating margin down to 2% in 2018).

Stock price

This stock currently has an enterprise price/EBI ratio of 32, which we think, is relatively slightly overvalued considering the decreased profit from its banana related operation.