Fresh Del Monte Produce has had an impressive run over the past six months as its shares have beaten the S&P 500 by 13.9%. The stock now trades at $36.44, marking a 19.1% gain. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Fresh Del Monte Produce, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Fresh Del Monte Produce Will Underperform?
We’re glad investors have benefited from the price increase, but we're cautious about Fresh Del Monte Produce. Here are three reasons why there are better opportunities than FDP and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Fresh Del Monte Produce struggled to consistently increase demand as its $4.31 billion of sales for the trailing 12 months was close to its revenue three years ago. This was below our standards and is a sign of poor business quality. 
2. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products, has a stronger brand, and commands pricing power.
Fresh Del Monte Produce has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 8.3% gross margin over the last two years. That means Fresh Del Monte Produce paid its suppliers a lot of money ($91.74 for every $100 in revenue) to run its business. 
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Fresh Del Monte Produce historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.4%, somewhat low compared to the best consumer staples companies that consistently pump out 20%+.
Final Judgment
We see the value of companies helping consumers, but in the case of Fresh Del Monte Produce, we’re out. With its shares topping the market in recent months, the stock trades at 15.9× forward EV-to-EBITDA (or $36.44 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Would Buy Instead of Fresh Del Monte Produce
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