Valuations and Brief Thoughts About Vodafone

Recently I decided it was probably time for me to value and analyze each of the companies remaining in my portfolio from before I truly dedicated myself to learning and becoming a “true investor.”  I had never valued any of the companies I am going to be writing about in the next several days.  I have read at least one annual report and one quarterly report, along with a myriad of other articles about each of the companies in the time since I bought them, and I am going to offer my brief thoughts on each.

I am also going to decide if I should keep, buy, or sell any of the companies after determining if I think any of them are under or overvalued.

Vodafone Valuations and brief thoughts

Vodafone (VOD) valuations done on September 10th, 2012.  Valuations in millions of GBP, except per share information, unless otherwise noted.  Valuations were done using 2012 10K.

Asset Reproduction Valuation

Assets: Book Value: Reproduction Value:
Current Assets
Cash and Cash Equivalents 7138 7138
Short Term Investments 1323 1323
Accounts Receivable (Net) 3885 3302
Inventories 486 243
Prepaid Expenses 3702 1851
Other Current Assets 3491 1746
Total Current Assets 20025 15603
PP&E Net 18655 9328
Equity and Other Investments 35899 17950
Goodwill 38350 15340
Intangible Assets 21164 8466
Deferred Income Taxes 1970 1000
Other Long Term Assets 3482 1741
Total Assets 139545 69427

Number of shares are 5096

Reproduction Value:

  • With intangible assets and goodwill: 69427/5096=13.62 GBP per share = $21.80 per share.
  • Without intangible assets and goodwill: 45621/5096=8.95 GBP per share = $14.33 per share.

EBIT and Net Cash Valuation

Cash and cash equivalents are 7,138

Short term investments are 5,096

Total current liabilities are 24,025

Cash and cash equivalents + short-term investments – total current liabilities=

  • 7,138+1,323-24,025=-15,564
  • -15,564/5,096=-3.05 GBP per share=-$4.78 in net cash per share.

Vodafone has an EBIT of 11,187.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

  • 5X11,187=55,935+8,461=64,396
  • 8X11,187=89,496+8,461=97,957
  • 11X11,187=123,057+8,461=131,518
  • 14X11,187=156,618+8,461=165,079
  • 5X=64,396/5096=12.64 GBP per share=$19.79 per share.
  • 8X=97,957/5096=19.22 GBP per share=$30.09 per share.
  • 11X=131,518/5096=25.81 GBP per share=$40.41 per share.
  • 14X=165,079/5096=32.39 GBP per share=$50.71 per share.

Revenue and EBIT Valuation

Numbers:
Revenue: 46417
Multiplied By:
Average 6 year EBIT %: 15.87%
Equals:
Estimated EBIT of: 7366.4
Multiplied By:
Assumed Fair Value Multiple of EBIT: 5X
Equals:
Estimated Fair Enterprise Value of VOD: 36832
Plus:
Cash, Cash Equivalents, and Short Term Investments: 8461
Minus:
Total Debt: 34890
Equals:
Estimated Fair Value of Common Equity: 10336
Divided By:
Number of Shares: 5096
Equals: GBP 2.03 per share=$3.27 per share

The $3.27 per share is my low estimate of value.  My base estimate of value using an 8X multiple was $10.16 per share, and my high estimate of value using an 11X multiple was $17.25 per share.

Price to Book and Tangible Book Valuation

Numbers:
Book Value: 126431.8
Minus:
Intangibles: 23806
Equals:
Tangible Book Value: 102625.8
Multiplied By:
Industry P/B: 1.7
Equals:
Industry Multiple Implied Fair Value: 174463.8
Multiplied By:
Assumed Multiple as a Percentage of Industry Multiple: 65%
Equals:
Estimated Fair Value of Common Equity: 113401.5
Divided By:
Number of Shares: 5096
Equals: GBP 22.25 per share=$35.62 per share.

The $35.62 per share is my low estimate of value.  My base estimate of value using a 95% multiple was $52.05 per share and my high estimate using a 125% multiple was $68.49 per share.

FCF and Cash Flow Valuation

Numbers
Operating Cash Flow: 12755
Minus:
Capital Expenditures: 7852
Equals:
Free Cash Flow: 4903
Divided By:
Industry Median FCF Yield: 6.17%
Equals:
Industry FCF Yield Implied Fair Value: 79465
Multiplied By:
Assumed Required FCF Yield As A % of Industry FCF Yield: 65%
Equals:
Estimated Fair Value of Common Equity of VOD: 51652.25
Divided By:
Number of Shares: 5096
Equals: GBP 10.14 per share=$16.23 per share.

Vodafone’s FCF yield is 5.41%.  The companies I used as comparisons are Verizon, China Mobile, and AT&T.

The $16.23 per share is my low estimate of value.  My base estimate of value was $23.71 per share and my high estimate was $31.20 per share.

Vodafone’s debt ratios are as follows:

  • Current assets to current liabilities: 20025/24025=0.83
  • Total debt to equity: 34957/76935=45%
  • Total debt to total assets: 34957/139576=25%

Brief Thoughts and Conclusions

Vodafone’s valuations are all over the place from a low of $3.27 a share to a high of $68.49 per share.  My cost basis for VOD is $27.37 per share.

After looking at its margins, reading its annual report and all that I have read since buying into Vodafone, I would use either the 8X EBIT and cash valuation, $30.09 per share, or my low estimate of value in the price to book and tangible book valuation, $35.62 per share, as my estimate of intrinsic value.  I would probably lean towards the $30.09 estimate of intrinsic value just to be safe, meaning that I think Vodafone is about correctly priced.

Knowing what I know now, I would not have bought into Vodafone when I did, or at this time, as it does not meet my minimum 30% margin of safety.   Others reasons I would not buy into it at this time are:

  • The high debt levels.
  • Massive amounts of cap ex-needed constantly.
  • The problems that it has had in India and other countries lately
    .

I do not think that Vodafone is a bad company by any stretch of the imagination, I just bought into them at too high of a price and for the wrong reasons; mainly its dividend.

I really like that it is a truly global company with some very good assets, including being a 45% owner of Verizon.

For now I am going to hold onto Vodafone until there is some kind of clarity from Verizon on its dividend payment strategy towards Vodafone, and/or until I find another company to buy as I think I will have a hard time making money at my currently too high-cost basis in Vodafone, and I will possibly look to sell my stake in VOD when I find another attractive company.

Vivendi News, Damodaran Valuing the Iphone Franchise, Buffett, Great Investors and Memory

Vivendi Studies Strategy After Two-Way Split Ruled Out is an article from Bloomberg Businessweek about what Vivendi might do now that it has allegedly ruled out breaking the company into two separate entities.  The interesting part of this article is that one of the scenarios states that Vivendi is looking at breaking up the entire company which would mean a sum of the parts valuation would be used.

My sum of the parts valuation done on 4-21-2012, written in my article here, came to a per share estimate of intrinsic value of $43.07 per share.  Looking back on the post now, I think that is a very conservative estimate.

Also on the Vivendi front, while I was reading Martin Whitman’s Third Avenue fund 3Q shareholder letter, I found that they have bought into Vivendi.  Here are their reasoning for buying into Vivendi at this time:

Also during the quarter, the Fund initiated a position in the shares of Vivendi S.A. (“Vivendi”), a company that has intrigued various members of our team for more than five years. The Fund had avoided investing in Vivendi’s shares for a variety of reasons, not the least of which were the company’s long-running addiction to debt-financed acquisitions and the absence of any discernible strategy for building shareholder value. In retrospect, the discipline paid off. The stock has performed very poorly over a long period of time. Vivendi spent much of its life as a French water utility, but in the mid-1990s was set on a path to become one of the world’s largest media and telecom empires. The improbable but very rapid transformation of Vivendi into a telecom and media giant was driven by a number of audacious debt fueled acquisitions. By the early 2000s, the tech, media and telecom bubble began to burst and the Vivendi empire famously came crashing down under a mountain of debt. The company spent much of the next decade languishing in the absence of strong management and a reasonable strategy. Most recently, though, considerable change is afoot at Vivendi. The company dismissed the CEO of its largest subsidiary, SFR, which is the second largest telecommunications company in France. SFR had been one of the epicenters of Vivendi mismanagement; the telecom company performed particularly poorly in the areas of cost management and in its failure to adequately address and confront the threat of new and increased competition. Shortly after the dismissal of SFR’s CEO, Vivendi’s board dismissed Vivendi’s own CEO, apparently as a result of irreconcilable strategic differences. Vivendi’s Chairman, who, during his own brief stint as CEO of Vivendi in the early 2000s, deleveraged the company considerably, has become the public face of the company and declared a strategic about-face. It appears that none of Vivendi’s underlying operating businesses are sacred any longer. As part of a broad restructuring effort, a number of its businesses have become subject to possible disposal in the effort to reduce Vivendi’s debt load and make headway in closing the gap between the share price and the underlying value of the company’s investee businesses, several of which are crown jewels within their respective industries. As it stands today, the company controls France’s second largest telecommunications company which, when combined with its control of the incumbent telecommunications company in Morocco and a highly successful Brazilian telecommunications company, would comprise a formidable global telecom business were they to be separated into an independent entity, as has been speculated. Vivendi also controls Canal +, France’s largest television business, as well as Universal Music and ActivisionBlizzard, the world’s largest music and video game businesses, respectively. There is considerable scope for dispositions as well as a sensible reconfiguration of the business into various components, all of which seem increasingly likely. Shares of Vivendi are trading at a considerable discount to our conservative estimate of its net asset value, essentially the current liquidation value of the company, and it appears that the mounting pressure on the company’s board has made value enhancing transactions and debt reduction increasingly probable.

Always nice to see a big time value fund buying into the companies you own.

Aswath Damodaran’s: Apple’s Crown Jewel: Valuing the iPhone Franchise is amazing valuation piece which could be used as a template to value other powerful franchises.

Warren Buffett Reflects on why he stayed in Omaha.

How to Gain an Investment Edge with Quotient’s Andre Bertolotti is a 4 minute video clip from The Manual of Ideas on how Bertolotti gains an edge in his investments.

How I got Religion and Dropped My Series 7 is a very interesting 6-minute video interview with the Reformed Broker about what he sees as the failings of holding the series 7 and the problems it can create in investment firms and Wall Street.

The Science and Psychology of Memory is a short write up from Farnam Street on things that you can do to improve your memory.

More links to come until I figure out if either of the two companies I have found to research deserve full article treatment.

Why I am holding my Altria shares for now, but would not buy at current price.

When I first started reading about Altria (MO) its dividend is what initially got me very intrigued.  Altria was the first company that I bought where I actually read an annual report so it was my starting point for the research I am doing now.  However, I was not doing any type of valuation or near the amount of research I am doing now so I got a bit lucky that my position is now up around 30%.  I started doing this write-up and research of Altria mainly to see how far I have come since I originally bought.

However, now that I have just read its most recent 10K and 10Q I have found many things that bother me about the company.

First I will give the reasons why I originally bought more than a year ago:

  • Big dividend in a low yield environment, the dividend has been growing as well.
  • Huge competitive advantages that I noticed even then: Addicted customers who were willing to keep paying higher and higher prices.  A government sponsored mini-monopoly since there aren’t likely to be any new entrants due to litigation and taxes.  Massive brand recognition and market share.
  • They were producing about $3 billion in FCF per year, which I thought was enough to cover the dividend.

Risks I saw then:

  • Massive debt load over $12 billion.
  • Litigation expenses.

Those were literally the only two concerns I had, and the only major concern of the two was the debt.  Altria seems to win a lot of its lawsuits or if they do lose, they end up having the amount to be paid out cut substantially, so that did not worry me too much.

The above are literally the only things I looked at before deciding to buy MO last year.  Not very in-depth thinking, and definitely not enough to get me even close to a buy or sell decision today.

Analysis now

Altria comprises Philip Morris USA, U.S. Smokeless Tobacco Company, John Middleton, Ste. Michelle Wine Estates, and Philip Morris Capital Corporation. It also owns a 27.1% interest in SABMiller, the world’s second-largest brewer. Through its tobacco subsidiaries, Altria holds the leading position in cigarettes and smokeless tobacco in the United States and the number-two spot in cigars. The company’s Marlboro brand is the leading cigarette brand in the U.S.

Having sold its international segments and the bulk of its nontobacco assets, Altria now operates primarily in the challenging U.S. tobacco industry. U.S. cigarette volume is in secular decline, and the Food and Drug Administration, having assumed regulatory control, has been quick to assert its authority. The threats of regulation and taxation have now overtaken litigation as the most significant risks to an investment in tobacco, in our view. Despite these headwinds, tobacco manufacturing is still a lucrative business, and we think Altria is poised to generate steady medium-term earnings growth. The addictive nature of cigarettes and Altria’s dominance of the U.S. market is the key reasons behind our wide economic moat rating.

The two descriptions above are taken from Morningstar.com.  You can view Altria’s SEC filings here.

Valuations:

These valuations are done by me, using my estimates, and are not a recommendation to buy any stock in any of the companies mentioned.  Do your own homework.

Valuations were done using 2011 10K and second quarter 10Q.  All numbers are in millions of US dollars, except per share information, unless otherwise noted. Valuations were done on July 27th 2012.

Net cash and EBIT valuation:

Altria has cash and cash equivalents of 1,528.

Its number of shares outstanding are 2,027.

Altria has total current liabilities of 6,081.

Cash and cash equivalents-total current liabilities=1528-6081=-4553.

  • -4553/2027=-$2.25 of net cash per share.

Altria has a trailing twelve month EBIT of 3519+6068-1295-1539=6753.

5X, 8X, 11X, and 14X EBIT+cash and cash equivalents=

  • 5X6753=33765+1528=35293
  • 8X6753=54024+1528=55552
  • 11X6753=74283+1528=75811
  • 14X6753=94542+1528=96070
  • 5X=35293/2027=$17.41 per share.
  • 8X=55552/2027=$27.41 per share.
  • 11X=75811/2027=$37.40 per share.
  • 14X=96070/2027=$47.40 per share.

Current price is $35.63 per share.

Market cap is 72.44 billion.

Enterprise value is 84.44 billion.

  • EV/EBIT=12.50

My average unit cost including dividends is currently $27.10 per share for the MO shares I currently own.

Only the 14X EBIT valuation would get me a reasonable margin of safety if I were to buy now.  If I were to buy MO shares now I would be using either the 11X or 14X EBIT valuations as my base case.

A couple things of note:  Altria has a negative net cash number which I generally do not like.  Altria’s EV/EBIT is higher than the companies I usually evaluate, which is another sign that it might be fairly or overvalued currently.

Revenue and EBIT valuation:

Using Trailing twelve month numbers:

Revenue: 16,670

Multiplied By:

Average 4 year EBIT percentage: 34.13%

Equals:

Estimated EBIT of: 5,689.47

Multiplied by:

Assumed fair value multiple of EBIT: 10X

Equals:

Estimated fair value Enterprise value of MO: 56,894.7

Plus:

Cash and Cash equivalents: 1,528

Minus:

Total Debt: 13,089

Equals:

Estimated fair value of common equity: 45,333.7

Divided by:

Number of shares: 2,027

Equals:

$22.36 per share.

Low estimate

My high estimate of value, which I would use as my base estimate of value in this case, was a 15X estimated EBIT multiple which came out to $36.40 per share, about evenly valued.

Free cash flow valuation:

Again using Trailing twelve month numbers.

Operating cash flow: 3,388

Minus:

Capital expenditures: 108

Equals:

Free cash flow (FCF): 3,280

Divided by:

Industry median FCF yield: 6%

Equals:

Industry FCF yield implied fair value: 54,666.67 ($26.97 per share.)

Multiplied by:

Assumed required FCF yield as a percentage of industry FCF yield: 95%

Equals:

Estimated fair value of common equity of MO: 51,933.34

Divided by:

Number of shares: 2,027

Equals:

$25.62 per share.

Low estimate

My high estimate, where I changed the assumed yield from 95% to 125% came out to $33.71 per share.

I would estimate its intrinsic value to be the 11X EBIT multiple from the net cash and EBIT valuation, $37.40 per share.

Through these valuations I have found Altria to be either overvalued or about fairly valued at current prices.  Looks like I got a bit lucky when I was doing no valuations, or the amount of research I am doing now, when I bought MO around $27 per share.

I was mainly doing this exercise to see how far I have come since I originally bought MO, doing no valuations and minimal research.  My intention when I started this was not to do a complete analysis, but I found a few things that gave me some pause while reading its SEC filings that I wanted to highlight.

Concerns:

  • All the litigation, which I will not detail here since it takes up at least 50 pages of the 10K.  If you would like further information please read Altria’s annual reports.
  • Altria has been issuing debt and drawing on its short-term credit line to in part sustain its stock repurchasing and dividend.
  • Debt of around $13 billion, around $11 billion of which came from its acquisition of US Tobacco in 2009.  Altria almost immediately charged about $5 billion of the transaction price to goodwill, meaning that that they paid almost double the price of the assets.  Quoting from the 10K “The excess of the purchase price paid by Altria Group, Inc. over the fair value of identifiable net assets acquired in the acquisition of UST primarily reflects the value of adding USSTC and its subsidiaries to Altria Group, Inc.’s family of tobacco operating companies (PM USA and Middleton), with leading brands in cigarettes, smokeless products and machine-made large cigars, and anticipated annual synergies of approximately $300 million resulting primarily
    from reduced selling, general and administrative, and corporate expenses. None of the goodwill or other intangible assets will be deductible for tax purposes.” To me paying almost double the price of the assets for supposed synergies does not make much sense and will also make it take longer for Altria to earn back its investment.
  • Altria has projected pension and health obligations of around $6.5 billion.  The projected amount has been rising by around $500 million a year for the last few years as well.
  • Altria has total off-balance sheet arrangements and aggregate contractual obligations of $33.7 billion, most of which are coming due after 2017, with around $4 billion a year needing to be paid over the next few years.  The total obligations include: Debt, Interest on borrowings, Operating leases, Purchase obligations, and other long-term liabilities.
  • Altria’s fair value of total debt as of the most recent 10K is $17.7 billion.  A 1% increase in market interest rates would decrease the fair value of Altria Group, Inc’s total debt by approximately $1.1 billion.  A 1% decrease in market interest rates would increase the fair value of Altria Group Inc’s total debt by approximately $1.2 billion.  This risk is taken directly from its 10K on page 95 of the final section of the 10K.  Since interest rates cannot go any lower, and will not stay low forever, rising rates are going to crush the debt of Altria, unless it can refinance portions of the debt, which could also make it harder for them to issue debt in the future.
  • The above are not even including the dropping rate of smoking in the US, and state and federal governments around the country regulating the tobacco industry so strictly that it has turned into a prohibition like industry.
  • People have been piling into the stock recently for the high yield, which could be turning into a mini bubble around the stock and other high yield companies.
  • Will not grow outside of the US.  That was the whole reason for the spin-off of Philip Morris (PM) so that Altria would have the US market, and PM would have the international markets.
  • Insiders only own 0.08% of company stock.
  • Since Altria does have a high debt load, it could preclude them from acquiring companies until it pays down some of the debt.

Pros:

  • Altria has ownership of one of the most recognized brands in the world, Marlboro.
  • Altria has 50% market share of the cigarette market in the US.
  • Altria has 55% market share in the smokeless products in the US.
  • Altria also has 30% market share in the cigar market in the US.
  • Altria own a 27% interest in SABMiller, valued currently at about $19 billion.  Altria could sell this asset if they needed to pay down debt.
  • Altria creates about $3 billion a year in FCF.
  • Its margins are gigantic: Gross margin at 54%, EBIT margin at 37%, ROIC at 19%, and FCF/Sales margin at 20%.
  • Addicted customers.
  • Because governments regulate the tobacco industry a lot, Altria will not have to deal with any new entrants any time soon.
  • Competitive advantages: Economies of scale, quasi government sanctioned monopoly.

How I think they could improve further:

Paying down the substantial debt would be a great step in the right direction.  In my opinion Altria should become a conglomerate, kind of a Berkshire Hathaway sin stock conglomerate.  Altria already owns a wine company subsidiary, and it owns part of one of the biggest beer producers in the world, and I think that MO could get further into that arena if they wanted to.  Altria could produce and sell marijuana when and if that ever becomes legalized since it would have the distribution lines already available.  Altria could also buy a company like Star Scientific (CIGX).  Here is Morningstars description of them, Star Scientific, along with its subsidiary, Star Tobacco, is a technology-oriented tobacco company seeking to develop, license, and implement technology to reduce the carcinogenic toxins in tobacco and tobacco smoke.

I remember reading a while ago that there was a rumor that either Altria or Philip Morris could buy CIGX to develop next generation cigarettes that did not have the carcinogens in them, thus alleviating the main concern with smoking.  I have not read any more rumors of that in a long time though.

One thing that is for certain, although smoking will never go away no matter how much governments regulate and tax the industry, Altria in my opinion, will eventually have to branch out at least a little bit due to declining rates of smoking in the US.

Conclusion:

Altria is one of the most dominant companies in the world.  It has a virtual monopoly in the United States in the cigarette and smokeless product segments, with at least 50% market share in both of those two industry segments.  The company has incredible competitive advantages that enable it to continue to have huge margins even with all the litigation, taxes, and regulation.

The company is not perfect as it has a myriad of issues that I outlined above.  If you were to buy Altria at the current prices, it appears that you would have no margin of safety and I would not recommend buying at this time.

However, I think the positives outweigh the negatives at the $27 price that I bought at, and I plan to hold onto my shares of Altria for hopefully decades, and hope to have my money compound well into the future.  If Altria can get its debt and pension obligations under control that should be no problem.

As always comments, concerns, and critique are welcome and would be appreciated.

Whopper Investments third weekly challenge, Altria, Greenlight Capital, and a Free Moat Webinar

Altria

Here is this weeks valuation and analysis challenge from Whopper Investments if anyone would like to try their hand.

This weeks challenge is McDonald’s from 2005 before Bill Ackman bought into them.  While I will be waiting to see what the readers post and see what I can learn from their analysis.  I will not be participating in the challenge this week.

Instead I will be researching, analyzing, and valuing Altria (MO) which I hold in my portfolio.

When I originally bought Altria I was not doing any type of valuation and I was not doing anywhere near the amount of research or analysis I am doing now.

I want to see:

  • A) What I would value them at to see if they are under or overvalued now.
  • B) I got a bit lucky as my position in them is now up about 30% since I originally bought, and I want to see if I would still buy them knowing what I know now.

I am interested to see how far I have come since then and hope to have my mini write up on the blog within a week.

Greenlight Capital

This is Greenlight Capital’s second quarter letter to shareholders.  They talk about Europe and some of its positions.

Free Moat Webinar

I cannot vouch for how good this free webinar on Moats from Morningstar is going to be since I have not watched it, but I thought I would put it on here for anyone who might be interested in it.

Enjoy

Dole VS Chiquita VS Fresh Del Monte (Part 4)

This article is the fourth and final article in the series detailing the businesses of Dole (DOLE), Chiquita (CQB), and Fresh Del Monte (FDP).  If you want to see the valuations and brief descriptions of these companies please view these articles: DOLE, CQB, and FDP

In this article I will go over the margins of all the companies to determine if there are any sustainable competitive advantages.  I will decide whether I would buy any of these companies as they currently stand, without the possibility of any kind of merger, spin off, or massive asset sales.  I will also look into whether or not a merger between any of the companies would be a good thing.

Before I start with my analysis of the three I need to go back and look into Dole’s total contractual obligations in comparison to Chiquita’s and Fresh Del Monte’s.  At the time I did Dole’s valuations I wasn’t doing as thorough of research as I am doing now, and did not talk about their total obligations in the original article I wrote.

On page 40 of Dole’s 2011 10K they list their total obligations and commitments as of December 31, 2011.  The total obligations and commitments, including debt is $4.68 billion, and over the next two years it comes out to $2.661 billion.  Their current market cap is $765 million. Not a great ratio, but not terrible like Chiquita’s. The total obligations/market cap ratios for all of the companies are:

  • Dole: 4680/765=6.12
  • Chiquita: 3167/220=14.40
  • Fresh Del Monte: 1992/1310=1.52

Fresh Del Monte has by far the most sustainable ratio in my mind and should have no problems if another crisis hits them individually or the economy as a whole.  Dole might be able to make it through another crisis, even if they don’t decide to do some kind of asset sale or spin off like they are looking into right now.  Chiquita’s ratio is horrendous and I would be worried about them if I was a shareholder of theirs.

All of these companies have low amounts of cash and cash equivalents on hand, which is another thing to possibly worry about with Dole and Chiquita if something bad were to happen in the economy.  In any kind of emergency they would most likely either default on some of their obligations,  have to draw down their credit facilities or, try to take on some more debt if they could, most likely on unfavorable terms.

Now let us get to the margins of all three and try to determine if any of them have a competitive advantage.

Dole (DOLE) Chiquita (CQB) Fresh Del Monte (FDP)
Gross Margin (Current) 10.5 12.9 8.8
Gross Margin (5 years ago) 9 12.4 10.8
Gross Margin (10 years ago) 16 16.1 16.1
Op Margin (Current) 2.7 -0.3 3
Op Margin (5 years ago) 1.9 0.7 5.2
Op Margin (10 years ago) 6.5 2.2 10.3
Net Margin (Current) 0.75 0.69 2.84
Net Margin (5 years ago) -0.83 -1.05 5.34
Net Margin (10 years ago) 0.83 0.91 9.34
FCF/Sales (Current) -0.58 0.12 2.66
FCF/Sales (5 years ago) N/A -0.08 2.42
FCF/Sales (10 years ago) N/A 2.37 11.86
BV Per Share (Current) $9.30 $17.42 $30.41
BV Per Share (5 years ago) N/A $21.03 $23.65
BV Per Share (10 years ago) N/A $15.80 $13.51
ROIC (Current) 2.16 1.53 5.21
ROIC (5 years ago) -2.12 -2.72 11.66
ROIC (10 years ago) 1.98 1.63 22.56
Insider Ownership (Current) 59.06% 3.33% 35.72%

These companies for the most part all have operations in the same segments and the next table will be showing the margins of those comparable operations.

Dole Chiquita Fresh Del Monte
Total Fresh Fruit EBIT 172 N/A N/A
Total Fresh Fruit Revenues 5,024 N/A 2,721
Fresh Fruit EBIT Margin 3.42% N/A N/A
Total Vegetable EBIT 31 N/A N/A
Total Vegetable Revenues 1,002 N/A 523
Vegetable EBIT Margin 3.10% N/A N/A
Packaged Food EBIT 96.5 N/A N/A
Packaged Food Revenues 1,197 N/A 355
Packaged Food EBIT Margin 8.10% N/A N/A
Total Operations EBIT 300 33.7 116
Total Operations Revenues 7,224 3,139 3,590
Total EBIT Margin 4.15% 1.07% 3.23%

In a perfect world Chiquita and Fresh Del Monte would have broken their operations out further like Dole does.  Instead they choose to combine their operations reporting data, especially the Operating Margin data, otherwise known as EBIT.  So at this point it is impossible for me to break out the data further than it is in the above table.

Taking the above information, combined with the information in the previous articles, I think that I have enough information to make some judgements on the companies.

As things currently stand I would NOT buy Chiquita under any circumstance, not even with the possibility of a spin off or asset sale.  Their low margins, combined with their huge amount of total obligations, and low cash on hand scare me too much to invest in them.  That is not even taking into account the fact that in my valuations I found them to be about fairly valued to slightly undervalued, not nearly enough of a margin of safety for me considering all the risks. I also do not see them being bought out by anyone due to their high amount of total obligations.  The only thing going in their favor is that they are selling for less than book value by a good margin, which is currently $17.42 per share, but at this point it looks to be justified.

Fresh Del Monte is interesting.  They are selling for less than book value by a good margin, which is currently at $30.41 per share, they generally have the best margins of the three companies, and they also have high insider ownership, which I always love.  However, by my estimates they appear to be slightly overvalued at this point, and have low cash on hand.  They are also the company out of the three in the best position to make some acquisitions, in my opinion a merger between Dole and Fresh Del Monte could possibly be a good thing. They have already been buying back a lot of shares and are the only one out of the three to pay a dividend, which are more pluses.  At this point I am not going to buy Fresh Del Monte, but I will wait for an opportunity when they are undervalued and will reassess at that time whether or not I will be a buyer then.

Without the possibility of a spin off or asset sale that I outlined in my original article on Dole, I would not be a buyer into their company right now either.  Pretty much the same problems as Chiquita: high debt/total obligations, low cash, low overall margins.  However, they do have high inside ownership, they are selling at a slight discount to book value, and by my valuations are extremely undervalued.  I do stick to my original assessment about Dole though, that they are a great spin off opportunity if they decide to do a spin off or asset sale.  If they do what I suggested in the original article I think they could unlock value, get rid of a lot of their debt, and become a much more focused and profitable company.  Especially if they put a lot of their resources into the packaged fruit portion of the business, as it has the highest margins in Dole’s operating structure.  Dole also has the 88,000 acres of land that they could sell some of to pay down debts as well.

I did buy half of a position in Dole based on the spin off thesis in my original article.  I am waiting to see if they announce a spin off or asset sale to jump fully into Dole at this point.  They are in the spin off portion of my portfolio which I plan to hold for 6 months to several years.  I do not consider them a long term buy and hold for decades company.

It also appears to me that none of the companies have any kind of sustainable competitive advantage, with their wildly fluctuating margins over the past 10 years, and no one becoming dominant.

I hope everyone has enjoyed and learned something from the analysis and valuation series on Dole, Chiquita, and Fresh Del Monte, and I look forward to some feedback.