Dole: Still Potential Long-Term Upside (NYSE:DOLE)

Dole (NYSE:DOLE), a major player in fresh produce, reported mixed Q1 results, yet this did not stop the stock from aiming even higher. So far, the shares are up 40% since January and a remarkable 60% over the last year.

Although the company has experienced a robust rally, it may face challenging comparables from the previous year, which may lead to a potential pullback in shares. Nevertheless, the predicted growth in earnings over the next few years could potentially make shares aim way higher.

Mixed First Quarter Results

On the 18th of May, 2023, Dole released its earnings results for the first quarter of fiscal 2023. While the company fell short of revenue expectations, its bottom-line performance exceeded projections and further fueled the stock rally.

Although Dole observed a 1% increase in revenue to reach $1.98 billion, it failed to meet Wall Street estimates by a substantial margin of over 10%, equating to approximately $190 million. However, when assessing revenue on a like-for-like basis, considering factors such as product pricing, Dole experienced a nearly 4% rise. The solid performance in the Fresh Fruit and Diversified EMEA segments primarily contributed to these robust results.

Within the Fresh Fruit segment, revenue soared to $798.9 million, representing a 6.5% surge compared to the first quarter of 2022. This growth can be attributed to global banana prices experiencing an upward trend, which helped offset the impact of higher fruit sourcing costs and reduced sales volume of pineapples. Dole has been actively working on enhancing its Fresh Fruit operations in Europe. However, due to the outbreak of the war in Ukraine, the company struggled to swiftly pass on the rising shipping and fuel expenses to customers.

The Diversified Fresh Produce EMEA segment witnessed more favorable market conditions than the previous year. Although revenue in this segment increased by a modest $7 million or 0.9%, the implementation of price hikes by the firm, supported by a dynamic pricing model, contributed to substantial revenue growth across multiple markets. In fact, on a like-for-like basis, the revenue actually increased by an impressive $58.1 million or 7.3%, but $53.4 were offset by the strengthening of the U.S. dollar against the European currencies.

Both segments are critically important for Dole, as they represent over 80% of the firm’s revenue and over 92% of Adjusted EBITDA of Q1. At the end of the quarter, the business recorded an adjusted EBITDA of $100.4 million, which is 9.3% higher compared to the same period last year. The company’s adjusted net income was $32.3 million, resulting in diluted earnings per share of $0.34. The earnings per share have surpassed the expected consensus estimate of $0.18 by almost twice the amount. Furthermore, Dole’s management recently announced a deal to sell its Fresh Vegetables division to Fresh Express for approximately $293 million in cash. Although this transaction is subject to adjustments and regulatory approvals, the cash inflow could be utilized to alleviate some of the debt burdens that have been weighing on the company’s earnings.

On the same day, Dole’s shares closed 8% higher.

Difficult Outlook For Dole

Dole is expected to face a challenging environment in fiscal 2023. Management has acknowledged that the current operating conditions present a mix of obstacles and opportunities for the business.

During Q1, the firm witnessed a significant increase in interest expenses, rising by approximately $10 million to reach $21 million. Since March 2022, the Fed has raised the interest rates ten consecutive times – a pace not seen since the 1980s. Despite that, management still does not expect annual interest payments to exceed $90 million for the full year.

Adding to the concerns, industry experts predict a drop in revenue for Dole of approximately 3.9% for Q2 and Q3 of fiscal 2023 compared to the previous year. This decline is expected to be even more pronounced in the earnings per share, where analysts anticipate a decrease of earnings per share of over 23% due to strong comparables.

However, this decline in earnings in the next couple of quarters is temporary. Annual estimates from analysts predict earnings per share to increase by 17.5% to $1.07 in 2024 and by nearly 21% to $1.29 in 2025.

Furthermore, during the Q1 press conference, management mentioned that the logistics and supply chains had shown signs of improvement, bringing a well-needed sense of stability after a period of disruption. The recent strengthening of the Euro against the U.S. Dollar and more stable fuel prices can further boost the business.

All in all, management believes that the firm will perform strongly and is positioned well to meet its full-year financial targets of $350 adjusted EBITDA.

Valuation & Risks

Shares of Dole are trading at $13.43 a share, and the company has a market capitalization of $1.27 billion. The stock is up 40% since the start of 2023, outperforming the S&P 500 (SP500) by more than 24%. Moreover, the gap becomes even more pronounced in the 1-year chart, where Dole is up 53.9% and the S&P500 just 16.2%.

Furthermore, Dole’s forward price-to-earnings (P/E) ratio of 14.9 suggests that the stock is relatively inexpensive compared to some of its peers. For instance, Mission Produce (AVO) and Calavo Growers (CVGW) have forward P/E ratios of 28 and 48, respectively, but not as cheap as Fresh Del Monte Produce (FDP) at a forward P/E ratio of just 13.

However, in terms of forward enterprise value-to-EBITDA (EV/EBITDA) ratio, Dole and Fresh Del Monte Produce are similar, with respective ratios of 7.84 and 7.9. Considering that Wall Street has a price target for Dole of $14.69, suggesting an upside potential of 9.4%, the stock seems fairly priced at this point.

Nevertheless, Dole’s shares appear to have a promising future. Analysts estimate earnings per share of $1.07 for 2024 and $1.29 in 2025 if take the P/E ratio range between 13 and 15 (just like Del Monte and Dole currently have), that would suggest a share price between $16.77 and $19.35 by 2025. Or anywhere between 25% and 44% in the next two years.

Besides, there is a chance that after selling the Fresh Vegetable division, Dole can use the proceeds to reduce the debt level further, which may boost the P/E multiple. The company currently has a strong balance sheet with $266 million in cash and a Debt/EBITDA ratio of 2.8x, below the firm’s target of 3x.

Risks

After such a strong rally through the past year and analysts expecting negative two quarters with negative earnings per share growth, there is a big chance that the stock may pull back a bit before it rallies again.

Dole is a fresh produce company, therefore we cannot ignore the weather as a factor too. Particularly the unusual weather events, such as unprecedented rains in California from earlier this year. Management noted that it could impact vegetable and berry crops in the region, thus financially impacting the business.

Last but not least, in its Q1 report, the firm mentioned that in February of 2023, Dole was a victim of ransomware. The incident had a limited impact on the business. However, despite best efforts from the company and third-party cybersecurity experts, the cyberattack cost the company $10.5 million. Still, there is no guarantee that something like this will not happen again and put more pressure on earnings.

Conclusion

Dole’s recent mixed first-quarter results have not impacted the stock’s performance, and despite the challenging comparables from last year, long-term prospects remain favorable. The company is expected to see substantial growth in earnings in the next couple of years. However, challenges such as weather-related events and cybersecurity threats that are not under the control of management could impact the company’s financial performance.