The world is becoming fascinated with that little fruit with the big nut - the avocado. It's something that Texans and Californians have known about for centuries and now the rest of the world wants it too. Today I want to look at two companies operating in two different parts of the avocado business but very much dependent on each other. One is Calavo Growers (short for CALifornia AVOcados) which simply markets and distributes the fruit but does not grow the product, and Limoneira which is an agribusiness company that grows the fruit but doesn't distribute it.
(Summary) (Company) (Daily Chart)
9 August 2015
1yr Target $59.00
Payout Ratio 93.75%
1yr Cap Gain 8.05%
1yr Tot Return 9.42%
Market Cap $948.95 Mil
1yr EarnGR ---
3yr EarnGR ---
5yr EarnGR ---
1yr DivGR 7.14%
3yr DivGR 10.77%
5yr DivGR 8.44%
Revenues $835.80 Mil
Earnings $14.10 Mil
EPS (ttm) $0.80
EPS next yr $2.23
(Summary) (Company) (Daily Chart)
9 August 2015
1yr Target $30.87
Payout Ratio 40.00%
1yr Cap Gain 51.84%
1yr Tot Return 52.72%
Market Cap $287.06 Mil
1yr EarnGR 16.66%
3yr EarnGR 55.80%
5yr EarnGR ---
1yr DivGR 5.88%
3yr DivGR 9.29%
5yr DivGR 13.93%
Revenues $109.10 Mil
Earnings $6.60 Mil
EPS (ttm) $0.45
EPS next yr $0.71
Calavo was founded in 1924 to market California avocados. In California, the growing area stretches from San Diego County to Monterey County, with the majority of the growing areas located approximately 100 miles north and south of Los Angeles County. Calavo sells to a diverse group of supermarket chains, wholesalers, food service and other distributors, under the Calavo family of brand labels, as well as private labels.
During fiscal year 2014, their 5 largest and 25 largest fresh fruit customers represented approximately 17% and 40% of their total consolidated revenues. During fiscal year 2013, their 5 largest and 25 largest fresh customers represented approximately 20% and 41% of their total consolidated revenues. During fiscal year 2014, 2013 and 2012 none of their fresh customers represented more than 10% of total consolidated revenues.
The Hass variety of avocado is the predominant variety marketed on a worldwide basis and California grown Hass avocados are available year-round, with peak production periods occurring between January through October. Other varieties have a more limited picking season and generally command a lower price. Approximately 1,900 California growers deliver avocados to Calavo pursuant to a standard marketing agreement. Calavo's share of the entire California avocado crop has remained at approximately 24% of all shipped avocados. Their solid foothold in the California industry is due to the competitiveness of the returns they pay to their customers and the communication and service they provide to their growers. Their ongoing strategy is for Calavo to continue its efforts in aggressively recruiting new growers, retaining existing growers, and procuring a larger percentage of the California avocado crop.
Calavo also imports avocados from Mexico and Chile. Their strategy is to increase their market share of currently sourced avocados to all accepted marketplaces. They believe their diversified avocado sources provide a level of supply stability that may, over time, help solidify the demand for avocados among consumers in all markets. They typically purchase Mexican avocados from growers and packers located in Mexico. The purchase price they pay for fruit acquired from Mexican growers is generally negotiated for substantially all the fruit in a particular grove. Once a purchase price is agreed to, the fruit is then harvested and delivered to their packinghouse located in Uruapan, Michoacán, Mexico, for shipment to the US. In fiscal year 2012, Calavo completed an expansion of our Uruapan packinghouse that more than doubled their capacity to handle Mexican avocados.
Calavo believes that their continued success in marketing Mexican avocados is largely dependent upon securing a reliable, high-quality supply of avocados at reasonable prices, and keeping the handling costs low. The Mexican avocado harvest, which is often considerably larger than the California avocado harvest, is both complimentary and competitive with the California market, as the Mexican harvest is near year round (most significant from September to June). During 2014, Calavo packed and distributed approximately 20% of the avocados exported from Mexico into the United States and approximately 5% of the avocados exported from Mexico to countries other than the US.
The company also procures a limited amount of avocados from Chile. Since the Chilean growing season is complimentary to the California season (August through February), Chilean avocados are able to command a competitive retail price in the market. During 2014 Calavo distributed an a very small percentage of the total amount of avocados imported into the US.
The perishable food products developed by Calavo include various other fruits and vegetables, including tomatoes, papayas, and pineapples. The majority of the company's perishable food sales are generated from tomatoes and papayas. Fortunately sales of their diversified fresh products do not generally experience significant fluctuations due to seasonality.
The Calavo Foods segment was originally conceived as a mechanism to stabilize the price of California avocados by reducing the volume of avocados available to the marketplace. In the 1960’s and early 1970’s, the company pioneered the process of freezing avocado pulp and developed a wide variety of guacamole recipes to address the diverse tastes of consumers and buyers in both the retail and food service industries. One of the key benefits of frozen products is their long shelf life. With the introduction of low cost processed products delivered from Mexican based processors, however, the company realigned the segment’s strategy by shifting the fruit procurement and pulp processing functions to Mexico.
Calavo utilizes ultra-high pressure technology equipment which is designed to protect and safeguard their avocado and guacamole products without the need for preservatives. Using high pressure only, this procedure substantially destroys the cells of any bacteria that could lead to spoilage, food safety, or oxidation issues. Once the procedure is complete, packaged guacamole is cased and shipped to various retail, club, and food service customers in the US and abroad. By the year 2010, the company had two 215L ultra high pressure machines in service. These machines located in Uruapan, pressurize all guacamole product lines, including all frozen products. A 3rd ultra-high pressure machine, with a larger capacity of 350L, was put into service during 2012. Net sales of the ultra high pressure (fresh) products sold to retail customers represented 45% and 46% of the total guacamole products sales for the years 2014 and 2013.
In February 2010, the company acquired a 65 percent ownership interest in newly created CSL which acquired substantially all of the assets of LSC. LSC is a regional producer in the upper Midwest of Salsa Lisa refrigerated salsas. The company believes that this line of salsa will further diversify their product offerings and be a natural complement to their ultra high pressure guacamole.
In June 2011, Calavo, CG Mergersub LLC (Newco), Renaissance Food Group, LLC (RFG) and Liberty Fresh Foods, LLC, Kenneth Catchot, Cut Fruit, LLC, James Catchot, James Gibson, Jose O. Castillo, Donald L. Johnson and RFG Nominee Trust (collectively, the Sellers) entered into an Agreement and Plan of Merger dated May 25, 2011 (the Acquisition Agreement), which sets forth the terms and conditions pursuant to which Calavo would acquire a 100 percent ownership interest in RFG. Pursuant to the Acquisition Agreement, Newco, a newly formed Delaware limited liability company and wholly-owned subsidiary of Calavo, merged with and into RFG, with RFG as the surviving entity. RFG is a fresh-food company that produces, markets, and distributes nationally a portfolio of healthy, high quality products for consumers via the retail channel.
RFG products range from fresh-cut fruit, ready-to-eat vegetables, recipe-ready vegetables and deli meat products. RFG sells under the popular labels of Garden Highway Fresh Cut, Garden Highway, and Garden Highway Chef Essentials to a wide range of customers. During fiscal year 2014, our 5 largest and 25 largest RFG product customers represented approximately 24% and 32% of our total consolidated revenues. During fiscal year 2013, our 5 largest and 25 largest RFG product customers represented approximately 18% and 27% of our total consolidated revenues. During fiscal years 2014, 2013 and 2012 none of our RFG product customers represented more than 10% of total consolidated revenues.
Limoneira is one of California’s oldest citrus growers. According to Sunkist Growers, Inc. (“Sunkist”), they are one of the largest growers of lemons in the US and, according to the California Avocado Commission, one of the largest growers of avocados in the US. In addition to growing lemons and avocados, the company grows oranges and a variety of specialty citrus crops. The company has agricultural plantings throughout Ventura, Tulare and San Bernardino Counties in California and in Yuma County in Arizona, which consist of approximately 4,000 acres of lemons, 1,200 acres of avocados, 1,400 acres of oranges and 700 acres of specialty citrus and other crops. They also operate their own packinghouses in Santa Paula, California and Yuma, Arizona, where they process, pack and sell lemons that they grow as well as lemons grown by others.
Water resources include water rights, usage rights and pumping rights to the water in aquifers under, and canals that run through, the land they own or lease. Water for the California farming operations is sourced from the existing water resources associated with the land, and includes the rights to water in the adjudicated Santa Paula Basin (aquifer) and the un-adjudicated Fillmore, Santa Barbara and Paso Robles Basins (aquifers). They also use ground water and water from the local water districts in Tulare County and the ground water in San Bernardino County. Following the acquisition of Associated Citrus Packers, the company began using ground water in Arizona from the Colorado River through the Yuma Mesa Irrigation and Drainage District.
For more than 100 years, Limoneira has been making strategic investments in California agricultural and real estate development. The company currently has five active real estate development projects in California. These projects include multi-family housing and single- family homes comprising approximately 200 completed units and another approximately 1,800 units in various stages of planning and entitlement.
Limoneira operates in three segments: agribusiness, rental operations, and real estate development. The agribusiness segment includes farming, packing and sales operations. The rental operations segment includes residential and commercial rentals, leased land operations and organic recycling. The real estate development segment includes real estate projects and development.
Limoneira is one of California’s oldest citrus growers and one of the largest growers of lemons and avocados in the US. In addition to growing lemons and avocados, the company grows oranges and a variety of specialty citrus and other crops. They have agricultural plantings throughout Ventura, Tulare and San Bernardino Counties in California and Yuma County in Arizona, which collectively consist of approximately 4,000 acres of lemons, 1,200 acres of avocados, 1,400 acres of oranges and 700 acres of specialty citrus and other crops. They also operate their own packinghouses in Santa Paula, California and Yuma, Arizona, where they process, pack and sell lemons that they grow as well as lemons grown by others.
Avocados. Limoneira is one of the largest avocado growers in the US with approximately 1,200 acres of avocados planted throughout Ventura County. Over the last 70 years, the avocado has transitioned from a single specialty fruit to an array of 10 varieties ranging from the green-skinned Zutanos to the black-skinned Hass, which is the predominant avocado variety marketed on a worldwide basis. Because of superior eating quality, the Hass avocado has contributed greatly to the avocado’s growing popularity through its retail, restaurant and other food service uses. Approximately 98% of our avocado plantings are of the Hass variety.
The company provides all of their avocado production to Calavo Growers, Inc. Calavo’s customers include many of the largest retail and food service companies in the US and Canada. The company's marketing relationship with Calavo dates back to 2003. Calavo’s proximity to Limoneira's agricultural operations enables the company to keep transportation and handling costs to a minimum. The company's avocados are packed by Calavo and sold and distributed under its own brands.
Primarily due to differing soil conditions, the care of avocado trees is intensive and have changed dramatically over the years. The need for more production per acre to compete with foreign sources of supply has required the company to take an important lead in the practice of dense planting (typically four times the number of avocado trees per acre versus traditional avocado plantings) and mulching composition to help trees acclimate under conditions that more closely resemble those found in the tropics.
Lemons. The company markets and sells lemons directly to food service, wholesale and retail customers throughout the United States, Canada, Asia, Australia and certain other international markets. We are one of the largest lemon growers in the United States with approximately 4,000 acres of lemons planted primarily in Ventura and Tulare Counties in California and in Yuma County, Arizona. In California, the lemon growing area stretches from the Coachella Valley to Fresno and Monterey Counties, with the majority of the growing areas being located in the coastal areas from Ventura County to Monterey County. Ventura County is California’s top lemon producing county. Approximately 45% of the company's lemons are grown in Ventura County, 30% in Tulare County, 25% in Yuma County, Arizona and 5% in San Bernardino County, California.
Approximately 90% of our lemon plantings are of the Lisbon and Eureka varieties and approximately 10% are of other varieties such as sweet Meyer lemons, proprietary seedless lemons and pink variegated lemons.
Oranges. While Limoneira is known for its high-quality avocados and lemons, they also grow oranges. They have approximately 1,400 acres of oranges planted throughout Tulare County, California. For many decades, the Valencia variety of oranges was grown in Ventura County primarily for export to the Pacific Rim. Throughout the late 20th century, developing countries began producing the larger, seedless Navel variety of oranges that successfully competed against the smaller Valencia variety. California grown Navel oranges are available from October to June, with peak production periods occurring between January and April. California grown Valencia oranges are available from March to October, with peak production periods occurring between June and September. Approximately 95% of the company's orange plantings are now of the Navel variety and approximately 5% are of the Valencia variety. The company utilizes Sunkist to market and sell a portion of their oranges under the Sunkist brand to food service wholesale and retail customers.
Specialty Citrus and Other Crops. A few decades ago the company began growing specialty citrus varieties and other crops that they believed would appeal to the changing North American and worldwide tastes. As a result, they currently have approximately 700 acres of specialty citrus and other crops planted such as Moro blood oranges, Cara Cara oranges, Minneola tangelos, Star Ruby grapefruit, pummelos, pistachios and olives.
Acreage devoted to specialty citrus and other crops in California has been growing significantly over the past few decades, especially with the popularity of the Clementine, a type of mandarin orange. Similar to the oranges, a portion of the specialty citrus crop is marketed and sold under the Sunkist brands.
Limoneira markets their other specialty crops, such as pistachios and olives, independently. All of the pistachios are harvested and sold to an independent roaster, packager and marketer of nuts. Olives are harvested and sold to third-party packers and shippers.
Lemon Packing and Sales. Limoneira is the oldest continuous lemon packing operation in North America. We pack and sell lemons grown by us as well as lemons grown by others. Lemons delivered to our packinghouses in Santa Paula, California and Yuma, Arizona are sized, graded, cooled, ripened and packed for delivery to customers. A significant portion of the costs related to our lemon packing operation is fixed. The company's strategy for growing the profitability of our lemon packing operations calls for optimizing the percentage of a crop that goes to the fresh market, or fresh utilization, and procuring a larger percentage of the California and Arizona lemon crop.
2. Rental Operations
Limoneira's rental operations include residential and commercial rentals, leased land operations and organic recycling. The rental operations segment represented approximately 4%, 5% and 6% of fiscal year 2014, 2013 and 2012 consolidated revenues, respectively.
Residential. The company owns and maintains approximately 200 residential housing units located in Ventura and Tulare Counties that they lease to employees, former employees and non-employees. The company is in the process of adding 71 new units in the Santa Paula area as a result of recently receiving approval from the Ventura County Planning Commission to build new residential housing units. These properties generate reliable cash flows which the company uses to partially fund the operating costs of their business and provide affordable housing for many of their employees and the community.
Commercial. The company owns several commercial office buildings and a multi-use facility consisting of a retail convenience store, gas station, car wash, and quick serve restaurant. As with their residential housing units, these properties generate reliable cash flows which the company can use to partially fund the operating costs of their business.
Leased Land. The company leases approximately 600 acres of their land to third party agricultural tenants who grow a variety of row crops such as strawberries, raspberries, celery and cabbage. The leased land business provides the company with a profitable method to diversify the use of their land.
Organic Recycling. With the help of their tenant Agromin, a processor of premium soil products and a green waste recycler located in Oxnard, California, the company has created and implemented an organic recycling program. Agromin provides green waste recycling for cities in Santa Barbara, Los Angeles and Ventura Counties. Limoneira worked with Agromin to develop an organic recycling facility on their land in Ventura County, to receive green materials (lawn clipping, leaves, bark, plant materials) and convert such material into mulch that the company spreads throughout their agricultural properties to help curb erosion, improve water efficiency, reduce weeds and moderate soil temperatures.
3. Real Estate Development.
The company's real estate development segment includes our real estate development operations. The real estate development segment represented approximately 1% of their consolidated revenues in fiscal years 2014, 2013 and 2012, respectively. Their current real estate developments include developable land parcels, multi-family housing and single-family homes with approximately 1,800 units in various stages of planning and development.
In June 2013, the company announced plans to build 71 agriculture workforce housing units in Santa Paula, California, that will be available for rent to local agriculture workers and Limoneira employees. The company estimates that the total cost of the development will be approximately $8.8 million and will be completed and available for rent during 2015. When fully occupied, annual rental revenue from the additional housing units is anticipated to be approximately $0.9 million.
In December 2013, the company entered into a construction contract that includes design and construction services for the expansion of their lemon packing facilities in Santa Paula, California. The project is expected to increase the efficiency and capacity of the packing facilities. The project is expected to cost $19 million to $21 million and be operational in 2015.
On June 30, 2014, the company acquired the packing house property, equipment and certain intangible assets of Marlin Packing Company from its sole shareholder, Marlin Ranching Company of Yuma, Arizona.
On August 14, 2014, through their wholly owned subsidiary, Limoneira Chile SpA, Limoneira paid $1.8 million for a 35% interest in Rosales S.A, a citrus packing, marketing and sales business located in La Serena, Chile. In addition, the company has the right to acquire the 52% interest of the majority shareholder of Rosales upon death or disability of Rosales’ general manager for the fair value of the interest on the date of the event as defined in the shareholders’ agreement.
I believe as more and more Latinos immigrate to this country over the next decades they will reinvent and refine the culinary tastes of the US and eventually the rest of the world. That will include many new fruits and vegetables and the avocado will be a huge beneficiary of that change. And I intend to own a piece of that financial tsunami by owning shares in the two companies above.
In addition, anyone who reads my articles knows I'm always interested in farms and timberland. Limoneira is no different. Add to that the fact that Calavo Inc and Limoneira are interconnected not only because Calavo buys all of Limoneira's product, but they are also each other's largest shareholder. I think each company's financial existence depends upon the success of the other and therefore their business relationships will necessarily support each other. I also believe there is a distinct possibility that someday these two companies could combine and become one larger company. The avocado business is a fragmented industry and these companies may be on the verge of becoming a much larger food company along the lines of DelMonte or Dole (although it may take years for that to happen). And I want to own a share of that business.