Avocado Imports And Cost Cuts To Drive Growth, But El Niño And Trade Tensions Threaten Margins

Key Takeaways

• Strategic sourcing and strong market positioning may drive sustained revenue growth and improved gross margins for Mission Produce.
  
• Improved cost optimization and diversified revenue streams, including avocados and blueberries, could enhance operational efficiency and earnings.
  
• Mission Produce faces challenges due to weather impacts, geopolitical tensions, operational adjustments, and market pressures affecting revenues, margins, and diversification strategy.

Catalysts

Engages in the sourcing, farming, packaging, marketing, and distribution of avocados, mangoes, and blueberries to food retailers, wholesalers, and foodservice customers in the United States and internationally.

• Mission Produce's efforts to optimize its global sourcing network and capitalize on favorable market conditions could lead to sustained strong revenue growth through consistent supply and competitive pricing, improving gross margins.
  
• The company's strategic investments in Guatemalan avocado imports, with USDA approval, are expected to fill market voids year-round, potentially increasing revenue and enhancing competitive positioning.
  
• Mission Produce's moderating capital expenditure trajectory following heavy investments is likely to boost future free cash flow, strengthening its balance sheet and potentially improving earnings.
  
• Proactive cost optimization efforts, particularly in the International Farming segment, combined with expected normalization of growing conditions, could lead to enhanced operational efficiency and increased net margins.
  
• Growth in the blueberries segment through new plantings and yield improvements may expand product offerings and diversify revenue streams, contributing positively to overall earnings.

Mission Produce Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mission Produce's revenue will decrease by -5.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.0% today to 2.7% in 3 years time.
• Analysts expect earnings to reach $28.1 million (and earnings per share of $0.39) by about January 2028, down from $36.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 51.8x on those 2028 earnings, up from 27.8x today. This future PE is greater than the current PE for the US Food industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 0.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Mission Produce Future Earnings Per Share Growth

Risks

• Mission Produce faces potential challenges in their International Farming segment due to unpredictable weather patterns such as El Nino, which impacted owned volume and could continue to affect revenues and net margins.
  
• The company's reliance on a global sourcing network increases exposure to geopolitical and trade tensions, such as potential tariffs on imports from Mexico, which could impact earnings and profit margins.
  
• The planned winding down of facilities in Toronto and Calgary due to inefficiencies reflects a need to adjust operations, which may result in transitional costs and affect short-term net margins.
  
• With the blueberry segment expecting lower year-over-year average sales prices due to increased industry volumes, there could be pressure on earnings from this diversification strategy.
  
• The transition to a larger crop cycle, especially with avocados, might lead to decreased pricing levels due to higher volumes, which could present a risk to maintaining elevated revenue levels in the upcoming fiscal periods.

Valuation

• The analysts have a consensus price target of $17.0 for Mission Produce based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $28.1 million, and it would be trading on a PE ratio of 51.8x, assuming you use a discount rate of 5.9%.
• Given the current share price of $14.37, the analyst's price target of $17.0 is 15.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.