Blueberry Expansion And Efficiency Gains Offset By Analyst Concerns On Profitability And Weather Risks

Key Takeaways

• Aggressive growth in blueberry operations and strategic focus on operational efficiency suggest enhanced revenue streams and potential for improved net margins.
  
• Mission Produce's operational resilience and competitive advantage in global sourcing and market penetration highlight potential for consistent earnings and international revenue growth.
  
• Dependence on specific weather patterns, sourcing challenges, and heavy investment in expansion present significant risks to profitability and supply chain consistency.

Catalysts

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

• The expansion of blueberry operations, pulling forward several projects due to strong cash flow, indicates an aggressive growth strategy in this segment. This diversification complements their current offerings and is expected to enhance revenue streams.
  
• Mission Produce's strategic focus on operational efficiency and cost optimization initiatives, particularly in response to poor growing conditions in Peru, suggests potential for improved net margins as conditions normalize.
  
• The company's successful mitigation of the impacts from smaller crops and their ability to maintain similar levels of adjusted EBITDA despite lower volumes of owned avocados sold indicates a strong underlying operational resilience. This resilience may contribute to consistent or improved earnings.
  
• The increase in market share in the U.K. and achieving profitability at the U.K. facility within a year of opening points towards successful market penetration and scalability of operations in new markets. It suggests potential for increased international revenue.
  
• Mission Produce's agility in leveraging global sourcing networks to overcome supply shortages, as well as their ability to capitalize on increased demand and higher pricing in the marketing and distribution segment, underscores its competitive advantage. This capability is likely to drive both revenue growth and margin improvement.

Assumptions

• Analysts are assuming Mission Produce's revenue will decrease by -10.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.1% today to 0.7% in 3 years time.
• Analysts expect earnings to reach $5.7 million (and earnings per share of $0.08) by about October 2027, down from $23.4 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 232.5x on those 2027 earnings, up from 36.8x today. This future PE is greater than the current PE for the US Food industry at 18.4x.
• Analysts expect the number of shares outstanding to grow by 0.59% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• Despite strong recent performance, reliance on specific weather conditions for farming operations, as seen with the impact of El Niño in Peru, poses a significant risk to future crop yields and, subsequently, product volume and revenue.
  
• Challenges in sourcing from multiple regions, such as disruptions in fruit harvesting in Mexico and the need to pivot to California-sourced fruit, indicate vulnerability in the supply chain that could affect the consistency of product availability and margins.
  
• The shifting focus to the U.K. market and efforts to grow market share in new regions bring execution risks related to adapting to local market dynamics and customer preferences, which could impact international revenue and profitability if not managed successfully.
  
• Heavy investments in expanding capacity, such as the acceleration of blueberry farming projects and construction costs associated with expanding the U.K. distribution facility, could strain cash flow and impact net margins if projected returns on these investments do not materialize as expected.
  
• The ongoing shift towards a Mexico-centric source model for avocados, as indicated by expectations for the fiscal fourth quarter, coupled with the potential for flat to slightly lower industry volumes, suggests that pricing and volume pressures could affect revenue growth and margins in the near term.

Valuation

• The analysts have a consensus price target of $15.5 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 2027, revenues will be $818.5 million, earnings will come to $5.7 million, and it would be trading on a PE ratio of 232.5x, assuming you use a discount rate of 5.8%.
• Given the current share price of $12.14, the analyst's price target of $15.5 is 21.7% 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.