Dole

The world's leading fruit producer and distributor

Oct 10, 2021

For the first time since the launch of my Substack, this thesis will be guest authored. In this case it is Ivan Fernandez, a young private investor, a physicist by profession. He is one of the people with whom I most discuss different investment topics, with a great clarity of ideas and one of the most intelligent people I know.

I would like to thank him enormously for his kindness, time and dedication to share with us the following investment thesis. You can find him on Twitter with the username @Fedez_Ivan.

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Before I begin, I wanted to give a big thank you to Galician Investor for this opportunity. I am sure that this journey, which started with the simple intention of making up for all the help I have been receiving from the magnificent Twitter and YouTube accounts, will lead to a friendship that will bring a lot to both of us and the excellent community that Galician is building.

Introduction

In this thesis I will try to introduce the reader to the current situation of Dole plc. It does not represent a recommendation to buy and I recommend further research to counteract my biased view of the company.

The motivation behind my interest in researching this company stems from the uncertainty in the market in the short to medium term. Worrying news are coming and some of them (not all) seem to me plausible and/or well founded, so I thought it was convenient to include a more defensive position in my portfolio.

These defensive positions not only soften market declines but also serve as a buffer to take advantage of the decline of high quality companies. In addition, it is always a good idea to have a balanced portfolio in order to have more alternatives when trading.

This is where Dole plc comes into play, a company I started to look at after its IPO at the end of July 2021. I will try to show the reader how this company fits my criteria and why I think it is a good opportunity to build a portfolio suitable for the current situation.

History

The origins of today's Dole plc can be traced back to the mid-19th century, when Charles McCann started a line of entrepreneurs by opening a fruit and vegetable wholesale business in the northeast of Ireland. Generation after generation, this family has succeeded in transforming that modest business into the world's leading global leader in fresh produce.

After two centuries of growth and acquisitions, the McCanns completed the merger of their company, Total Produce, and Dole Food Company with a New York Stock Exchange listing in July 2021 to raise the funds necessary to complete the acquisition.

Aaa — Figure 1: Timeline of Total Produce and Dole Food Company

Currently, the family controls almost 8% of the shares of this company, which employs more than 40,000 employees in 30 different countries.

Key Ratios

We will focus on the historical analysis of Total Produce, since it is this company that acquires Dole Foods Company and whose managers control the resulting company. Their behavior will show us how the managers act.

Slow but stable organic growth over the last 10 years (CAGR of 5.8% from 2011 to 2020). Very mature sector with low growth.
Stable margins over the years.
Good debt control. Use of debt and shareholder dilution for acquisitions.
Stable ROE and ROIC between 10 % and 15 %.

Dole within the sector

The fresh fruit and vegetable sector has traditionally been considered a defensive sector. Over the last 10 years, the size of the fruit and vegetable market has grown at around 2% per year. It is expected to grow at around 3% CAGR in the coming years, mainly due to the trend towards more balanced eating; in the case of organic products, this growth is expected to be around 16 %.

We can see the growth of the sector in the US in the following extra image from grand-viewresearch.

Figure 2: History of the U.S. fruit and vegetable sector.

Within this industry we can distinguish 3 subsectors: production, transportation and distribution. The expected increase in demand makes it essential to consider these subsectors as a whole.

Production

This refers to the control and management of farmland and is the most competitive area. The large distributors have great bargaining power, which generally results in a poor selling price from the growers.

In the case of Dole plc, it owns farmland (109,000 acres of farms), partly managed by itself and partly leased. In its flagship products, it produces part and buys the rest from different producers (it produces around 30 % of the bananas it sells and 70 % of the pineapples).

Transportation

This is the critical part of the sector. Much of the fruit and vegetables consumed in Europe and the United States are produced in regions of South America and Africa, so it is essential to transport them to the distribution points, generally by sea.

Since March 2020, the price of sea freight has tripled, increasing the cost of sales for distributors and driving up retail prices. Since this is a sector with very low margins, this cost increase greatly affects the company's performance. This growth is shown in the extra image from ategi.com.

Figure 4: Price of ocean freight in the last year

Herein lies the strength of Dole plc: The merger of the two companies forms a fleet of 10 refrigerated container ships and six refrigerated ships compatible with conventional pallets, in addition to refrigerated and dry containers (also leased). This fleet allows Dole plc to have greater control over transportation costs.

Distribution

Finally, we have the subsector that distributes the products to the different points of sale.

In this subsector it is very important to have a wide distribution network, which allows the company to optimize its resources and reduce costs. Scale also provides a certain amount of bargaining power.

In this respect, Dole plc has around 250 facilities around the world, including salad manufacturing plants, cold storage facilities, packaging plants, distribution and manufacturing facilities. This enables it to efficiently serve its customers, primarily in the U.S. and Europe.

As we can see, Dole plc is a vertically integrated company in the sector, which gives them total control of the product from production to sale to the consumer, allowing them to minimize costs. To this is added its scale: it is the largest company in the sector, so it has great bargaining power and is able to compete through the price of its products.

Thus, its scale and versatility show its superiority over its competitors. In terms of revenue alone, Dole plc is twice that of its main competitor, Fresh Del Monte Produce, which is the second largest company in the sector.

Future

Looking ahead, Dole plc has a 6-step plan:

Invest in the production of fresh products to continue to lead the sector.
Introduce the Dole brand (leader in the U.S.) in Europe.
Take advantage of the fragmented nature of the sector to carry out non-ergic mergers and acquisitions.
Increase the variety of products offered.
Increase their presence in high-growth products (avocados, berries, organic products and prepared dishes such as salads).
Optimize the supply chain.

In summary, Dole plc seeks to reduce costs through acquisitions and R&D, expand geographically and increase market share in the fastest growing products while maintaining its current leadership in other products. We can also highlight that Dole plc is strengthening ties with local producers, taking advantage of the movement to incentivize local consumption and reducing costs and environmental footprint.

This is the path that the management team has been following during its management of Total Produce with more than evident effectiveness. If we listen to their track-record, we can be confident that the growth strategy will be well executed.

If all targets are met, the company's growth will be above the 3% growth rate of the fresh produce sector. Stealing market share from smaller competitors and taking advantage of the higher growth of these products.

Finally, the current management has already demonstrated its control of debt. They leverage cash flow to repay debt, reinvest in organic growth and a small shareholder payout in the form of a dividend. Once they decrease debt and accumulate a certain amount of cash, they have always sought to make a strategic acquisition to continue to grow.

Valuation

Unlike the vast majority of investment theses, I will not be valuing this company going forward.

At present, Dole plc estimates that by 2020 it will have made an adjusted EBITDA of about $371m. To be conservative let's take $350m. If we take the average EV/EBITDA of its competitor, Fresh Del Monte Produce, which is around 9x, we arrive at an EV of $3150m. If we subtract its debt of $1400m, we can arrive at a valuation of $18.8 per share.

This valuation is very conservative, as we have taken a lower EBITDA and applied the multiple of a clearly lower quality company. We can make another estimate from the normalized net income (which can be found in the pro-forma report), arriving at a valuation of almost $20 by applying the average P/E of Fresh Del Monte Produce (P/E of 15).

It should be remembered that these valuations are obtained with 2020 results. In 2021 and beyond, as the effects of synergies between the two companies are shown, these valuations may change dramatically. A more complete valuation can be found in the following video.

In view of the above, it is clear that Dole plc enjoys a high margin of safety. Add to this the fact that it is in a very defensive sector, has a strong advantage over its competitors and a management that is aligned and managing the company well. This management superiority over the competition can be seen by looking at the growth of Total Produce (5.8%) compared to the sector (2%); it should also be noted that during these years the dividend they have been distributing has grown at a 7.6% CAGR.

In summary, we find that Dole plc fulfills:

It is a defensive company.
It ́s in a sector that withstands periods of crisis well.
It is the largest and most versatile company in the sector.
It is clearly undervalued still making outdated and conservative valuations.
It is stealing market share from its most direct competitors.
Good management team management.
Management team aligned with the shareholder.

Undoubtedly, this is a very good opportunity to include in the portfolio a defensive company at a good price that provides stability to the portfolio.

DISCLAIMER: This is not a buy or sell recommendation, it is my own view of the company. Each person should do their own research.