CHIQUITA BRANDS INTL INC CQB
October 06, 2009 - 6:03pm EST by
aviclara181
2009 2010
Price: 17.02 EPS $2.40 $3.98
Shares Out. (in M): 46 P/E 7.1x 4.3x
Market Cap (in M): 775 P/FCF n/m n/m
Net Debt (in M): 536 EBIT 172 235
TEV: 1,311 TEV/EBIT n/m n/m

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Description

Chiquita Brands International is one of the largest marketers and distributers of bananas and other fresh produce in the world. I believe that the Company's business is about to benefit from a number of powerful tailwinds, including increased profitability from its salad business restructuring, strength of the euro relative to the US dollar, lower production costs for bananas and declining interest expenses. As described in detail below, I believe that Chiquita has potential to achieve 2009 EPS of $2.40 (vs. consensus of $2.15) and 2010 EPS of nearly $4.00 (vs. consensus of $2.23). Based today's closing price $17.02, CQB is trading at approximately 4.3x 2010 EPS and 3.8x 2010 EV/EBITDA.

Business Description:

Chiquita operates three separate business segments, including bananas ($1.95bln of 2009E sales), salads and healthy snacks ($1.0bln) and other produce ($250mm). Despite being just 60% of total sales, the banana division generated nearly all of the Company's EBIT in 2007 and 2008. This pattern will end in 2009, as the salads business has undergone a restructuring, and will produce at least 6% EBIT margins in 2009 (company guidance).

For those readers who are not familiar with the banana industry, coffee1029 does a very good job of illustrating the industry dynamics in a July 29, 2008 write-up for Fresh Del Monte.

Earnings Potential:

Bananas Segment:

Banana industry fundamentals remain very strong, and Chiquita has positioned itself to be an outsized beneficiary. CQB has disproportionately large exposure to the European market, with 62% of its banana segment sales coming from that region. The European banana market remains tight, and pricing should continue to show year-over-year inflation of low-single digits. More importantly, CQB is a massive beneficiary of the strength of the euro. Chiquita has historically bought put options to hedge out the downside, but maintains exposure to euro appreciation. Based on the Company's September investor presentation, CQB is 35% covered at $1.39 for 2010 and could purchase additional puts at even more favorable rates since the euro spot is currently at $1.47. Despite sourcing a great deal of their inventory from South America, Chiquita uses US dollars, and thus has not been hurt on cost side by a weak dollar. CQB management believes that for every $0.01 move in the euro, it equates to a $4.5mm change in EBIT. In my base-case, I assume that the euro averages $1.43 in 2010. However, the current spot is $1.47 and many economists believe the dollar will continue to weaken. If the euro were to average a rate of $1.47 in 2010, it would benefit CQB EBIT by $31.5mm, or approximately +$0.60 of EPS upside.

Another tailwind for the banana segment is that it will anniversary $25mm of incremental costs due to flooding (mostly experienced in 1H 2009, see the recent September 2009 investor presentation). With approximately three weeks left, the 2009 storm season has been more moderate than 2008, and management has a good idea of what next year's crop supply looks like. Assuming the storm season ends without major disruptions to key sourcing countries, management expects to get that $25mm back next year and return to a more normalized cost environment. This should not be interpreted as a one-time benefit. The $25mm of increased costs in 2009 were above and beyond a normal year's spend on floods. This would equate to incremental earnings per share of $0.50

The North American banana market largely operates based upon annual price contracts. Chiquita's expirations typically roll throughout the year, and therefore it has good pricing visibility through September 2010. Management was on the road marketing recently, and indicated to investors that they anticipate North American price inflation similar to that experienced in 2009 (approximately +3%).  However, for my earnings bridges shown below, I assume that North American banana EBIT is flat year-over-year in 2010 (ex-flood cost savings).

Salads and Healthy Snacks:

Since Chiquita bought Fresh Express in 2005, it has dramatically underperformed the Company's initial expectations. Some of this was out of Chiquita's control (e-coli impact), but a lot of the issues were related to an overaggressive and unsuccessful product expansion plan (Fruit in a Bottle, etc). After several years of managerial errors, I believe that Chiquita has finally taken the appropriate steps to permanently turn the salad business around. This is a segment that will generate over $1.0bln in sales this year, and was thought to be a 10% EBIT margin business at the time of acquisition.

Why will this business finally work? The restructuring has eliminated 500 low-or-unprofitable SKUs (cutting a lot of food service business out) and will focus on its remaining 250 SKUs. Additionally, they have closed 2 facilities and will relocate more production to a northeast facility. Another important step relates to contract renegotiations, as fuel surcharges were only included in 50% of Chiquita's old contracts. The salad business produced an EBIT margin of 7.3% in 1H 2009 and management has guided to a full year 2009 EBIT margin of "at least 6.0%." For my earnings bridge, I assume the bottom end of this guidance in 2009. Additionally, my 2010 base case only contemplates 50bps of EBIT margin improvement, or 6.5%. I believe this is conservative and that the Company can easily get to 7.5% or higher next year just by moderating its robust marketing spend. 

Earnings Bridges: 

2H 2009 Earnings Bridge from 2H 2008            
                 
    EBIT EPS   Note      
2H 2008 EPS          ($1.10)          
2H09 Chg in Bananas $7.0     Q3 euro headwind offset by Q4 tailwind.
                 
Implied 2H Salad 17.3     Assumes 6% EBIT for 2009 on $1.0bln sales
2H08 Salad Loss 22.2            
Total 2H Chg in Salad 39.5            
                 
Corporate Expense (6.0)            
Interest Expense 6.7     Guidance of $50-54mm total 2009 expense
Total Y-Y Change $47.2            
Taxes   (4.2)      9.0% Tax      
Net Income Y-Y Change $43.0 $0.94   Assumes 45.5mm shares  
2H 2009 EPS          ($0.16)   Guidance implies 2H EPS loss of ($0.47)
Add: 1H 2009 EPS Actual     $2.57          
Expected 2009 EPS   $2.41   Current Consensus is $2.15  

The annual earnings bridge assumes that Chiquita will use free cash flow to pay down debt. This is a continuation of the current strategy, and will provide a $12mm tailwind to 2010.

2010 Earnings Bridge from 2009 - Base Case          
                 
    EBIT EPS   Note      
2009 EPS      $2.41          
Flooding Loss 2009 $25.0     From Sept 2009 pres. Not a one-time benefit. 
Salad Improvement              5.0     Flat sales and just 50bps margin expansion
Currency Benefit            17.1     Assumes 1.43 euro in 2010 (current spot 1.47)
Bunker Cost Increase          (10.0)     Based on September 2009 presentation
Interest Savings- 09              6.0     Year-over-year lower run-rate interest expense
Interest Savings- 10              6.4     Impact from debt pay down throughout 2010
Net Improvement $49.5            
Taxes   ($4.5)      9.0% Tax      
Net Income Y-Y Change $45.1 $0.99          
2010 Expected EPS   $3.40   Assumes flat bananas EBIT ex-flooding loss savings
Current Consensus    $2.23          
Premium to Consensus   52.6%          

2010 Earnings Bridge from 2009 - Upside Case          
                 
    EBIT EPS   Note      
2009 Expected EPS    $2.41          
Flooding Loss 2009 $25.0     From Sept 2009 pres. Not a one-time benefit. 
Salad Improvement        15.0     Flat sales and just 50bps margin expansion
Currency Benefit            35.1     Assumes current spot euro of 1.474 in 2010
Bunker Cost Increase          (10.0)     Based on September 2009 presentation
Interest Savings- 09              6.0     Year-over-year lower run-rate interest expense
Interest Savings- 10              7.1     Impact from debt paydown throughout 2010
Net Improvement $78.2            
Taxes   ($7.0)      9.0% Tax      
Net Income Y-Y Change $71.2 $1.56          
2010 Expected EPS   $3.98   Assumes flat bananas EBIT ex-flooding loss savings
Current Consensus    $2.23          
Premium to Consensus   78.3%          

 

Valuation:

At today's closing price of $17.02, Chiquita was trading at 7.1x my expected 2009 EPS and a ridiculous 4.3x my 2010 EPS. On an EBITDA basis it is currently trading at 3.8x my 2010 estimate. Not only are these valuations extremely cheap on an absolute basis, but they represent massive discounts to Fresh Del Monte on 2010 P/E (53%) and EV/EBITDA (42%). I am not advocating an outright short position of Fresh Del Monte, but I would argue that Chiquita deserves at least an equivalent multiple, and more appropriately, a premium. Relative to Fresh Del Monte, Chiquita's multiple has recently been penalized for its higher financial leverage as well as its failing salad business. Both of these issues have been resolved and each will continue to improve in 2010. I would expect investors to reward CQB with multiple expansion. Using a 10x multiple on my 2010 EPS, my price target is $40.

It is important to note that my analysis does not give any benefit to potential decreases in the European tariff for bananas or cost savings through additional African sourcing (which will ramp up in 2010 and 2011). Though the timing is unclear for a change in the tariff regime, most in the industry expect a gradual step down in the rate over 7-8 years. Through discussions with management, the impact could be around $11mm of annual cost savings. The company will likely pass some of these savings on, but if they are able to retain $8mm, this would add an additional $0.15 each year as the tariff steps down.

Catalyst

- Q3 earnings results and implied guidance for the remainder of FY2009

- Upward analyst revisions for 2010

- Multiple re-rating as investors begin to realize earnings potential of the salad business.

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    Description

    Chiquita Brands International is one of the largest marketers and distributers of bananas and other fresh produce in the world. I believe that the Company's business is about to benefit from a number of powerful tailwinds, including increased profitability from its salad business restructuring, strength of the euro relative to the US dollar, lower production costs for bananas and declining interest expenses. As described in detail below, I believe that Chiquita has potential to achieve 2009 EPS of $2.40 (vs. consensus of $2.15) and 2010 EPS of nearly $4.00 (vs. consensus of $2.23). Based today's closing price $17.02, CQB is trading at approximately 4.3x 2010 EPS and 3.8x 2010 EV/EBITDA.

    Business Description:

    Chiquita operates three separate business segments, including bananas ($1.95bln of 2009E sales), salads and healthy snacks ($1.0bln) and other produce ($250mm). Despite being just 60% of total sales, the banana division generated nearly all of the Company's EBIT in 2007 and 2008. This pattern will end in 2009, as the salads business has undergone a restructuring, and will produce at least 6% EBIT margins in 2009 (company guidance).

    For those readers who are not familiar with the banana industry, coffee1029 does a very good job of illustrating the industry dynamics in a July 29, 2008 write-up for Fresh Del Monte.

    Earnings Potential:

    Bananas Segment:

    Banana industry fundamentals remain very strong, and Chiquita has positioned itself to be an outsized beneficiary. CQB has disproportionately large exposure to the European market, with 62% of its banana segment sales coming from that region. The European banana market remains tight, and pricing should continue to show year-over-year inflation of low-single digits. More importantly, CQB is a massive beneficiary of the strength of the euro. Chiquita has historically bought put options to hedge out the downside, but maintains exposure to euro appreciation. Based on the Company's September investor presentation, CQB is 35% covered at $1.39 for 2010 and could purchase additional puts at even more favorable rates since the euro spot is currently at $1.47. Despite sourcing a great deal of their inventory from South America, Chiquita uses US dollars, and thus has not been hurt on cost side by a weak dollar. CQB management believes that for every $0.01 move in the euro, it equates to a $4.5mm change in EBIT. In my base-case, I assume that the euro averages $1.43 in 2010. However, the current spot is $1.47 and many economists believe the dollar will continue to weaken. If the euro were to average a rate of $1.47 in 2010, it would benefit CQB EBIT by $31.5mm, or approximately +$0.60 of EPS upside.

    Another tailwind for the banana segment is that it will anniversary $25mm of incremental costs due to flooding (mostly experienced in 1H 2009, see the recent September 2009 investor presentation). With approximately three weeks left, the 2009 storm season has been more moderate than 2008, and management has a good idea of what next year's crop supply looks like. Assuming the storm season ends without major disruptions to key sourcing countries, management expects to get that $25mm back next year and return to a more normalized cost environment. This should not be interpreted as a one-time benefit. The $25mm of increased costs in 2009 were above and beyond a normal year's spend on floods. This would equate to incremental earnings per share of $0.50

    The North American banana market largely operates based upon annual price contracts. Chiquita's expirations typically roll throughout the year, and therefore it has good pricing visibility through September 2010. Management was on the road marketing recently, and indicated to investors that they anticipate North American price inflation similar to that experienced in 2009 (approximately +3%).  However, for my earnings bridges shown below, I assume that North American banana EBIT is flat year-over-year in 2010 (ex-flood cost savings).

    Salads and Healthy Snacks:

    Since Chiquita bought Fresh Express in 2005, it has dramatically underperformed the Company's initial expectations. Some of this was out of Chiquita's control (e-coli impact), but a lot of the issues were related to an overaggressive and unsuccessful product expansion plan (Fruit in a Bottle, etc). After several years of managerial errors, I believe that Chiquita has finally taken the appropriate steps to permanently turn the salad business around. This is a segment that will generate over $1.0bln in sales this year, and was thought to be a 10% EBIT margin business at the time of acquisition.

    Why will this business finally work? The restructuring has eliminated 500 low-or-unprofitable SKUs (cutting a lot of food service business out) and will focus on its remaining 250 SKUs. Additionally, they have closed 2 facilities and will relocate more production to a northeast facility. Another important step relates to contract renegotiations, as fuel surcharges were only included in 50% of Chiquita's old contracts. The salad business produced an EBIT margin of 7.3% in 1H 2009 and management has guided to a full year 2009 EBIT margin of "at least 6.0%." For my earnings bridge, I assume the bottom end of this guidance in 2009. Additionally, my 2010 base case only contemplates 50bps of EBIT margin improvement, or 6.5%. I believe this is conservative and that the Company can easily get to 7.5% or higher next year just by moderating its robust marketing spend. 

    Earnings Bridges: 

    2H 2009 Earnings Bridge from 2H 2008            
                     
        EBIT EPS   Note      
    2H 2008 EPS          ($1.10)          
    2H09 Chg in Bananas $7.0     Q3 euro headwind offset by Q4 tailwind.
                     
    Implied 2H Salad 17.3     Assumes 6% EBIT for 2009 on $1.0bln sales
    2H08 Salad Loss 22.2            
    Total 2H Chg in Salad 39.5            
                     
    Corporate Expense (6.0)            
    Interest Expense 6.7     Guidance of $50-54mm total 2009 expense
    Total Y-Y Change $47.2            
    Taxes   (4.2)      9.0% Tax      
    Net Income Y-Y Change $43.0 $0.94   Assumes 45.5mm shares  
    2H 2009 EPS          ($0.16)   Guidance implies 2H EPS loss of ($0.47)
    Add: 1H 2009 EPS Actual     $2.57          
    Expected 2009 EPS   $2.41   Current Consensus is $2.15  

    The annual earnings bridge assumes that Chiquita will use free cash flow to pay down debt. This is a continuation of the current strategy, and will provide a $12mm tailwind to 2010.

    2010 Earnings Bridge from 2009 - Base Case          
                     
        EBIT EPS   Note      
    2009 EPS      $2.41          
    Flooding Loss 2009 $25.0     From Sept 2009 pres. Not a one-time benefit. 
    Salad Improvement              5.0     Flat sales and just 50bps margin expansion
    Currency Benefit            17.1     Assumes 1.43 euro in 2010 (current spot 1.47)
    Bunker Cost Increase          (10.0)     Based on September 2009 presentation
    Interest Savings- 09              6.0     Year-over-year lower run-rate interest expense
    Interest Savings- 10              6.4     Impact from debt pay down throughout 2010
    Net Improvement $49.5            
    Taxes   ($4.5)      9.0% Tax      
    Net Income Y-Y Change $45.1 $0.99          
    2010 Expected EPS   $3.40   Assumes flat bananas EBIT ex-flooding loss savings
    Current Consensus    $2.23          
    Premium to Consensus   52.6%          

    2010 Earnings Bridge from 2009 - Upside Case          
                     
        EBIT EPS   Note      
    2009 Expected EPS    $2.41          
    Flooding Loss 2009 $25.0     From Sept 2009 pres. Not a one-time benefit. 
    Salad Improvement        15.0     Flat sales and just 50bps margin expansion
    Currency Benefit            35.1     Assumes current spot euro of 1.474 in 2010
    Bunker Cost Increase          (10.0)     Based on September 2009 presentation
    Interest Savings- 09              6.0     Year-over-year lower run-rate interest expense
    Interest Savings- 10              7.1     Impact from debt paydown throughout 2010
    Net Improvement $78.2            
    Taxes   ($7.0)      9.0% Tax      
    Net Income Y-Y Change $71.2 $1.56          
    2010 Expected EPS   $3.98   Assumes flat bananas EBIT ex-flooding loss savings
    Current Consensus    $2.23          
    Premium to Consensus   78.3%          

     

    Valuation:

    At today's closing price of $17.02, Chiquita was trading at 7.1x my expected 2009 EPS and a ridiculous 4.3x my 2010 EPS. On an EBITDA basis it is currently trading at 3.8x my 2010 estimate. Not only are these valuations extremely cheap on an absolute basis, but they represent massive discounts to Fresh Del Monte on 2010 P/E (53%) and EV/EBITDA (42%). I am not advocating an outright short position of Fresh Del Monte, but I would argue that Chiquita deserves at least an equivalent multiple, and more appropriately, a premium. Relative to Fresh Del Monte, Chiquita's multiple has recently been penalized for its higher financial leverage as well as its failing salad business. Both of these issues have been resolved and each will continue to improve in 2010. I would expect investors to reward CQB with multiple expansion. Using a 10x multiple on my 2010 EPS, my price target is $40.

    It is important to note that my analysis does not give any benefit to potential decreases in the European tariff for bananas or cost savings through additional African sourcing (which will ramp up in 2010 and 2011). Though the timing is unclear for a change in the tariff regime, most in the industry expect a gradual step down in the rate over 7-8 years. Through discussions with management, the impact could be around $11mm of annual cost savings. The company will likely pass some of these savings on, but if they are able to retain $8mm, this would add an additional $0.15 each year as the tariff steps down.

    Catalyst

    - Q3 earnings results and implied guidance for the remainder of FY2009

    - Upward analyst revisions for 2010

    - Multiple re-rating as investors begin to realize earnings potential of the salad business.

    Messages


    Subjectcartel / politics
    Entry10/06/2009 11:18 PM
    Memberad188

    went bankrupt once, cartel in favor of jobs in south american and african countries, this company is hated in the industry, no end game, so how does an investor make money? just wait around for the market to pay more for it?

     


    SubjectRE: cartel / politics
    Entry10/07/2009 03:03 PM
    Memberaviclara181

    - Chiquita was overlevered, and the 2001 bankruptcy is behind them at this point. Financial leverage is currently at a moderate 2.3x net debt/EBITDA (using Consensus 2009 EBITDA). I believe that the robust free cash flow generation between now and December 31, 2010 will bring net debt down to around $360mm. On my numbers this would put financial leverage at 1.2x 2010 EBITDA. My numbers outlined in the initial write-up call for EBITDA of around $290mm in 2010. Even if CQB opted against paying down debt and maintained the current interest expense run-rate of $46mm (based on guidance), they would still have EBITDA / Interest expense coverage of 6.3x. On street consensus numbers this ratio still is a robust 5.0x. It would be very tough to argue that CQB has credit issues and a material risk of bankruptcy. An additional point would be that CQB does not have more than $20mm of debt due annually until 2014. Their balance sheet is very clean.

    As far as job creation in South America and African countries, Chiquita benefits both regions by stimulating economic activity. Many of these countries rely heavily on agriculture as a major conrtibuter to GDP, and as you can see from the following text in this year's 10-K, Chiquita is key contributer for many countries in each region:

    "During 2008, approximately one-fifth of all bananas sold by Chiquita were sourced from each of Costa Rica and Guatemala. Chiquita also sources bananas from numerous other countries, including Panama, Ecuador, Colombia, Honduras, Nicaragua and the Philippines. Chiquita sold its Ivory Coast operations in January 2009. In 2008, Chiquita entered into long-term strategic sourcing agreements in Mozambique and Angola and expects to begin sourcing bananas from these countries in 2010. In 2008, approximately one-third of the bananas sourced by Chiquita were produced by subsidiaries on owned farms and the remainder were purchased from independent growers under short and long-term fruit supply contracts in which Chiquita takes title to the fruit either at packing stations or once loaded aboard ships.

    Although Chiquita maintains broad geographic diversification in purchased bananas, it relies to a significant extent on long-term relationships with certain large growers. In 2008, Chiquita's five largest independent growers, which operate in Colombia, Ecuador, Costa Rica and Guatemala, provided approximately 48% of Chiquita's total volume of purchased bananas from Latin America. In January 2008, Chiquita entered into a new agreement with an affiliate of C.I. Banacol S.A., a Colombia-based producer and exporter of bananas and other fruit products, for the continuing purchase of bananas produced in Colombia and Costa Rica through 2012. Through this agreement, Chiquita purchases approximately 15 million boxes of bananas per year, primarily from Colombia, which continues to account for more than 19% of the company's purchased banana volume."

    My point in the write-up, is that the an investor does not have to wait very long to make money by buying Chiquita. The point is that earnings are dramatically understimated by the street and the Company has solved many of its historical issues. My arguement is that this earnings power that investors envisioned several years ago when CQB bought Fresh Express is finally about to take hold. The banana segment should continue to perform well as all three players in the oligopoly (FDP, CQB, and Dole) are rational and will all have published financials going forward (Dole IPO coming up). Even if you want to keep the same 7x EPS multiple on this stock, it is still worth $28. Though it should be noted that both CQB and FDP are trading at near all-time low valuations.


    SubjectRE: deserves a higher multiple than fdp?
    Entry10/07/2009 03:06 PM
    Memberaviclara181

    - First, let me be clear. As I stated in my write-up, I am NOT advocating an outright short FDP position. Both stocks are very cheap. Let's start with asking why FDP had a premium multiple in the first place? In my opinion (and I have owned FDP many times in the past and paid these multiples), it is due to two major reasons: lower financial leverage and better return on invested capital. First, as addressed in my response to ad188's previous question, CQB is no longer very highly levered at 2.3x current net debt/EBITDA (street 2009 EBITDA) vs. Fresh Del Monte at current leverage of 1.2x. On an absolute basis, neither company is overly levered, and by the end of 2010, I believe that CQB will be at 1.2x levered. Additionally, like FDP (after their recent refinancing), Chiquita does not have any material debt maturities for years - 2014 for CQB and 2013 for FDP. The second reason for the multiple discount in my opinion relates to the underperformance of Chiquita's salad business. As I mentioned in my write-up, this business was bought with the idea that it could produce 10% EBIT margins. This business has historically been mismanaged by CQB and rather than getting to 10% margins, it has actually lost money. The reason I believe this business has permanantly changed is due to the aggressive restructuring untertaken over the past year. The components of the restructuring were addressed in detail on the Q2 conference call. However, as a reminder, CQB has cut out 500 SKUs (out of 750 total) that had low-or-no profitability. Many of these SKUs related to the difficult food service industry. Food service used to be about 25% of sales in the salad business and now will account for just 10% (based on discussions with management). Additionally, they have streamlined the Verdelli restructuring, as well as closing two high cost plants and consolidating operations to one plant in the northeast. Based on guidance, the salad business will produce "at least 6.0%" margins in 2009, but it is clear that there is more work to be done (lowering marketing spend, renogotiate more contracts to include fuel surcharges, continued plant efficiencies) and this margin will grow.

    I would argue that those two issues are drastically improving and investors can no longer penalize CQB for them relative to FDP. Additional reasons why CQB should trade at an equivalent, or premium to FDP are:

    1) It has much stronger brand recognition with consumers

    2) Hedging strategy - CQB buys puts on the euro, therefore limiting downside when the dollar strengthens, but realizing the upside when the dollar weakens. FDP doesn't hedge a lot, but when they do, they just buy forward contracts...so as is the case with a year like 2009, they can open themselves up to the volatility and additional risk. Also, CQB hedges fuel, whereas FDP does not.

    3) Sourcing strategy - FDP owns a lot more of its plantations and is more exposed to damages and impairments. CQB only sources one-third of its bananas on owned farms. This gives them greater flexibility to shop for the lowest cost as well as limit risk to major damages.


    SubjectRE: ?
    Entry10/07/2009 03:21 PM
    Memberaviclara181

    - Before I show you a conservative analysis of normalized earnings, I would argue that 2010 will be the first year where we can actually see what a normal year for Chiquita should look like: 1) Bananas will show moderate inflation on both the sales and cost side. Banana volumes should be stable. We will see what the normal costs look like again next year since 2009 earnings were hit by the one-time flooding costs. 2) Salads will still be in its restructuring period, and may not get to a "normalized margin," but it should improve from this year's margin which is still far from peak. I would view 10% operating margins as peak for this business. 3) CQB will continue to delever and we should see a lower level of interest expense....which will be a permanant change to the income statement.

    Bananas   $2,100
    margin   8.5%
      EBIT             179
         
    Salad   $1,200
    margin   8.0%
      EBIT               96
         
    Other Produce             25
    Corporate            (72)
      EBIT             228
    Interest            (40)
         
    EBT             188
    Tax            (19)
    Normalized NI           169
    Shares             45.5
         
    Normalized EPS            $3.71
    Multiple   11.0 x
    Target          $40.80


    SubjectRE: new margin guidance
    Entry10/29/2009 09:58 AM
    Memberaviclara181

    Thanks Luke0903. I thought that the quarter was very impressive. The earnings were strong across the board, and I thought that Fernando and his team did a very good job of answering questions during the conference call.

    Accounting for the increase in margin guidance for the salad's business (and slighly lower than expected corp G&A), my new 2009 EPS is $2.75.

    Additionally, the commentary during the conference call gave me additional comfort that my thesis is playing out, and that my base case of $3.40 2010 EPS is easily acheivable.

    Hopefully this helps.


    SubjectEuropean Tariff Reduction
    Entry11/18/2009 03:28 PM
    Memberaviclara181

    Last night, the Financial Times, Dow Jones, Bloomberg and several other news outlets reported that the European Union is close to resolving a longstanding dispute with Latin American countries over import tariffs on bananas. Currently, banana producers must pay a duty of 176 Euros per metric ton on shipments to the 27-nation EU, while no surcharge is imposed on imports of the fruit from former British and French colonies in Africa and the Caribbean.

    Last July, the EU and Latin American nations agreed on a gradual reduction of the import tariff to 114 euros in 2016. However, the EU refused to implement the reduction. I have never included this tariff reduction as part of my long CQB thesis, but if an agreement does get signed, the tariff reduction will benefit Chiquita. As a note, it should benefit each of the three public banana producers (FDP, CQB and DOLE), but give disproportionate upside to Chiquita given its larger exposure to Europe as a percentage of sales.

    Chiquita's management team has commented in the past that they believe that every 10 Euro reduction in the tariff equates to $11mm of cost savings, or $0.22 of EPS. It is important to note that street estimates do not include a tariff reduction.

    I believe there are two ways to think about how the reduction of the tariff can impact the current marketplace (detailed below). In summary, I believe that when the tariff agreement is finally signed, it can add between $3.56 to $8.39 per share of value in today's dollars.

    Scenario 1: Chiquita only retains a portion of the first year's savings as additional players can enter the marketplace as profitability is now viable. However, after year 1, the gradual step downs are smaller and not material enough to give economic incentive to incremental players to begin supplying. Therefore, after year 1, all of the cost savings should flow through to the bottom line.

      Current 2010 2011 2012 2013 2014 2015 2016
    Tariff per Ton € 176.00 € 148.00 € 142.33 € 136.67 € 131.00 € 125.33 € 119.67 € 114.00
    Tariff Change   (€ 28.00) (€ 5.67) (€ 5.67) (€ 5.67) (€ 5.67) (€ 5.67) (€ 5.67)
                     
    Implied Cost Savings   $30.8 $6.2 $6.2 $6.2 $6.2 $6.2 $6.2
    Retained Savings %   50% 100% 100% 100% 100% 100% 100%
    Retained Savings $   $15.4 $6.2 $6.2 $6.2 $6.2 $6.2 $6.2
    Tax Adjusted  10.0% $13.9 $5.6 $5.6 $5.6 $5.6 $5.6 $5.6
    Per Share Savings $0.30 $0.12 $0.12 $0.12 $0.12 $0.12 $0.12
    Cumulative EPS    $0.30 $0.43 $0.55 $0.67 $0.80 $0.92 $1.04
                     
    EPS Multiple  8.0x 9.0x 10.0x 11.0x 12.0x 13.0x    
    2016 Per Share Value $8.36 $9.40 $10.44 $11.49 $12.53 $13.58    
    NPV through 2016 $2.52 $2.52 $2.52 $2.52 $2.52 $2.52    
    Terminal NPV $3.61 $4.06 $4.52 $4.97 $5.42 $5.87    
    Value Accretion $6.14 $6.59 $7.04 $7.49 $7.94 $8.39    
                     
    Discount Rate 15.0%              

     Scenario 2: Chiquita retains nearly all of the cost savings in year 1 because the current supply of bananas is very tight and it will be very difficult for new players to acquire supply. Then, in the out years, more supply will be available and the cost savings will not be material and CQB may have to give back some of the initial benefit.

      Current 2010 2011 2012 2013 2014 2015 2016
    Tariff per Ton € 176.00 € 148.00 € 142.33 € 136.67 € 131.00 € 125.33 € 119.67 € 114.00
    Tariff Change   (€ 28.00) (€ 5.67) (€ 5.67) (€ 5.67) (€ 5.67) (€ 5.67) (€ 5.67)
                     
    Implied Cost Savings   $30.8 $6.2 $6.2 $6.2 $6.2 $6.2 $6.2
    Retained Savings %   85% -10% -10% -10% -10% -10% -10%
    Retained Savings $   $26.2 ($0.6) ($0.6) ($0.6) ($0.6) ($0.6) ($0.6)
    Tax Adjusted  10.0% $23.6 ($0.6) ($0.6) ($0.6) ($0.6) ($0.6) ($0.6)
    Per Share Savings $0.52 ($0.01) ($0.01) ($0.01) ($0.01) ($0.01) ($0.01)
    Cumulative EPS    $0.52 $0.51 $0.49 $0.48 $0.47 $0.46 $0.44
                     
    EPS Multiple  8.0x 9.0x 10.0x 11.0x 12.0x 13.0x    
    2016 Per Share Value $3.55 $3.99 $4.44 $4.88 $5.33 $5.77    
    NPV through 2016 $2.03 $2.03 $2.03 $2.03 $2.03 $2.03    
    Terminal NPV $1.54 $1.73 $1.92 $2.11 $2.30 $2.49    
    Value Accretion $3.56 $3.76 $3.95 $4.14 $4.33 $4.52    
                     
    Discount Rate 15.0%              


    SubjectCQB Short Interest
    Entry01/26/2010 12:06 PM
    Memberrab

    Short interest on CQB has increased from 4mm shares to 8mm shares in the past three months and those shorts read/heard the same earnings call we did.  What are they shorting for?  Is there a torpedo that is being ignored?

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