Dole: Successful Expansion, Worrying Margins

Dole (DOLE) is one of the world’s largest fresh fruits and vegetable producers. Specifically, Dole is one of the most prominent players in the production of fresh bananas and pineapples, and one of the leaders in value-added salads and fresh-packed vegetables.

The company has been growing its presence in categories such as berries, avocados, and organic produce, as well.

Dole’s “portfolio” of fresh products includes more than 300 types of fruits cultivated and sourced from more than 30 countries, distributed and marketed in over 75 countries through retail, wholesale, and foodservice channels.

Dole’s competitive advantage in an industry with basically no barriers to entry is its sheer scale, which allows it to achieve tremendous operating efficiencies through vertical expansion.

The company owns approximately 109,000 acres, operates 13 vessels, utilizes five salad manufacturing plants, and has 162 distribution and manufacturing facilities.

To put Dole’s global footprint into perspective, according to its F-1 filing, Dole is nearly twice as big as its next largest industry peer when it comes to total production.

Since Dole IPOed last summer, shares have performed rather underwhelmingly, treading mostly lower over time. However, the company’s performance last year was rather solid.

At its current and projected profitability levels, it appears that Dole shares could be rather undervalued. Still, the company is heavily indebted, and the fresh produce business is notorious for its razor-thin margins.

Should the company’s costs rise disproportionally to its products’ prices amid the ongoing tough labor market and supply chain bottlenecks, Dole’s bottom line could be compressed heavily.

I am neutral on the stock.

Improving Sales Performance…

Over time Dole has been able to vertically expand its operations, achieve economies of scale, and unlock operating efficiencies.

The company grew revenues by a CAGR of just over 5% per year over the 15 years prior to its IPO, powered by internal growth and smart acquisitions.

Since Dole was separated from Fyffes in 2006, the company has closed more than 100 acquisitions. These acquisitions helped Dole significantly in its expansion efforts, leading to revenues more than tripling during this time, from $2.1 billion in 2006 to $7.1 billion in 2020 (including total produce’s share of joint ventures and associates).

Note that the $7.1 billion in revenues illustrates the outcomes of the acquisition of DFC by TP and the impacts of the IPO and refinancing as if they had happened on January 1st, 2020. The actual GAAP-reported revenues for Fiscal 2020 were $4.35 billion, 4.31% higher than Fiscal 2019.

Last year, Dole remained on its growth trajectory, posting revenues of $6.45 billion, implying an extraordinary year-over-year increase of 48.5%.

Growth was driven by Dole acquiring the remaining 55.0% of DFC and increased demand across all of Dole’s reporting segments. Including DFC, total revenues for the year amounted to $9.3 billion.

For instance, despite lower sales volumes amid the ongoing supply chain bottlenecks, the division of the fresh fruits reported sales growth of 2.9%, driven by higher banana pricing in North America and higher pineapple pricing in North American and European markets.

The fresh vegetable segment also saw its sales increase by 1% compared to the previous year, again, primarily due to Dole raising prices.

… But Margins Remain Razor-Thin

Despite reporting robust revenues, Dole’s margins remain rather thin, as per the nature of its operations. The gross profit margin for the full year came in at just 7.7%.

Despite adjusted net income growing 11.8% year-over-year to $141.2 million, this implies a slim net income margin of just 1.5%. Therefore, you can see how a miniature swing in expenses or revenues can easily lead to no profits or even a negative bottom line.

For Fiscal 2022, management expects adjusted EBITDA to land in the range of $370 million and $380.0 million. Along with pro-forma revenue estimates in the range of $9.6 billion to $9.9 billion, the company essentially expects to achieve an adjusted EBITDA margin of 3.8%.

This compares with an adjusted EBITDA of $290.1 million and an adjusted EBITDA margin of 3.1% in Fiscal 2021. Hence, despite the ongoing supply chain hurdles and rising costs, Dole’s profitability is likely to somewhat improve this year.

Still, investors should be wary as Dole’s bottom line is very susceptible to slight shifts in the income statement’s variables, as we just mentioned.

Wall Street’s Take

Turning to Wall Street, Dole has a Moderate Buy consensus rating, based on two unanimous Buys assigned in the past three months.

At $19.50, the average Dole price target implies 52.5% upside potential.

Conclusion

Dole’s expansion efforts over the past decade have been rather successful, growing the company’s top line consistently. With the company buying the rest of DFC recently, Dole has solidified its position as one of the most prominent players in the industry.

Based on management’s Fiscal 2022 outlook, Dole should be profitable this year. In fact, analysts forecast fiscal 2022 EPS to land at around $1.41.

This implies a forward P/E close to 9 at Dole’s current price levels. While this multiple may sound rather attractive, we stress that Dole’s bottom line could be easily influenced by the underlying costs and turn negative during unfavorable trading periods.

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