Introduction

Dole plc (NYSE:DOLE) sells fresh fruit and vegetables worldwide. In the last decade, Dole has managed to put up decent revenue growth with EBITDA following alongside. After the merger with another peer in 2021, the company has taken on a significant amount of debt and has managed to navigate inflationary pressures and supply chain challenges, all while maintaining profitable even on thin margins. While shares are down 10% over the last twelve months, I see value in the company’s shares and see a path to de-leveraging the balance sheet; something I believe will help Dole’s valuation narrow the gap between itself and its peers.

Company Overview

Dole is an international provider and distributor of fresh produce. Despite being an Irish company, the company has global operations with 31% of revenues derived from the U.S., 8% from the U.K., 6% from Spain, 6% from Sweden, 4% from Ireland, and 44% from the rest of the world. With over 300 products that the company sells, Dole sources both locally and globally to package, ship, market, and distribute fruits and vegetables.

Background

Despite being a major player in the fresh produce industry and being profitable for as far back as I can get financials, Dole has some of the smallest margins I’ve ever seen, barring negative margin, unprofitable companies. On $8.25 billion in revenue in FY’23, the company did just $328 million in EBITDA for a 4% margin (source: Bloomberg). Compared to where it was a decade ago, margins are roughly double where they used to be.

When looking at the company’s financials, Dole has been able to compound revenues and EBITDA at high rates. While a large portion of this is acquisitive growth, and not organic, the company’s revenues have grown at an 11.3% CAGR with EBITDA growing at a 17.2% CAGR over the last decade. In the last five years, the company’s CAGRs are even higher, with revenues and EBITDA growing at 15.6% and 22.2%, respectively (source: S&P Capital IQ).

What’s driving this growth? During the 2020-21 period, Dole merged with another Irish company, Total Produce. Total Produce was formed 18 years ago from tropical fruit group, Fyffes, after the two companies separated via demerger. Under this new merger between Dole and Total Produce, shareholders of Total Produce received 82.5% of shares in Dole plc, and at that time, Dole plc did a U.S. listing to raise over a half billion to fund the transaction. This merger was the reason why Dole’s revenues went from $4.45 billion in 2020 to $8.02 billion in 2022. At the time of merger, the two companies announced a long-term target of 5- 7% annual growth in EBITDA.

Recent Results

When looking at Dole’s latest quarterly results for Q1’24, the company saw revenue clock in at $2.12 billion, which was a 6.6% increase compared to last year. This was in large part because of good operational performance in all of the company’s segments. For Fresh Fruit, revenue was up 3.2%, revenue in Fresh Produce – EMEA was up 7.0%, and revenue in Fresh Produce – Americas & ROW was up 12.8%.

While revenue was up in the Fresh Fruit segment, EBITDA was up only 0.3%. Most of this was due to higher volumes and lower fruit sourcing costs, but higher volumes in bananas and pineapples made sales rise. In the Fresh Produce segments, EMEA’s revenue was favorable because of FX translation, but Northern Europe and South Africa were strong regions, leading to a 10% increase in EBITDA. In the Americas fresh produce segment, seasonal factors, higher cherry volumes, and higher pricing on avocados led to strong performance. Removing the impact of the disposal of the progressive produce contribution, adjusted EBITDA more than doubled, up $8 million.

Altogether, this was a strong quarter for Dole, with decent performance across the board. Given this, the company maintained its target to generate similar performance to 2023 in adjusted EBITDA on a like-for-like basis. Guidance now implies that EBITDA should reach at least $360 million for FY’24.

Outlook

While EBITDA growth is estimated to flat for next year, I think there’s still reasons to be optimistic on Dole’s long-term outlook. For example, one of the big themes for investors of Dole has been one of de-leveraging the company’s balance sheet. At the end of the quarter, the company had $1.02 billion in total debt and $239 million in cash for Net Debt of $776 million. Based on LTM EBITDA of $388 million, the company now has Net Leverage of 2.0x, down from 3.2x two years ago.

With adjusted EBITDA of $360 million ($385 million in FY’23 less $23.5 million from Progressive Produce), capex of $110 million (guidance), and interest expense of $75 million (guidance), Dole has distributable cash flow of around $175 million which it can use to pay debt, buyback stock, and pay dividends. With $30 million earmarked for dividends (based on historical FY’23 dividend payments), I estimate that the company could de-lever by at least 0.3 turns by the end of the year.

I also think that the $360mm is a very conservative estimate by management, which they might be guided because of the uncertainty of the macro environment. When we consider greater than expected profitability on the divested business (implied mid-single digit margins compared to 1-2% for the remaining Americas and RoW business), it would almost seem as if EBITDA would need to stay flat to down. As such, $360 million in EBITDA may seem too conservative and not give enough credit for opportunities to reduce overhead costs and generate continued cost efficiencies. If the actual EBITDA for the year is greater than what management is leading on, the company could de-lever quicker than expected.

Another factor that may accelerate debt reduction would be the potential sale of one of Dole’s business units. Over the last few quarters, the company has communicated that it’s exploring exit options for the Fresh Vegetables business following the termination of the agreement with Fresh Express. Previously, the U.S. Department of Justice blocked a transaction where Dole would have sold the business to them, but now that that’s off the table, Dole will need to find an alternative acquirer. A sale of this business unit would free up cash that could be used to repay debt.

Valuation and Wrap Up

Key risks to the investment thesis would be largely macroeconomic factors. A slowdown in global growth, geopolitical tensions, and shipping and logistical challenges would all be areas to monitor. For what it's worth, I think Dole has done a good job of managing the challenges it faced during the pandemic, consistently maintaining profitability. A better balance sheet should help to mitigate the impact of such risks, as a flexible balance sheet would provide the company with flexibility.

Relative to its peers, I find Dole’s valuation to be quite attractive. Comparing Dole to similar Consumer Staples companies, Dole trades at 6.6x forward EBITDA and 10.1x P/E. Compared to the median forward multiples of 8.3x EV/EBITDA and 12.0x P/E, Dole seems to offer a compelling discount.

Is this discount warranted? Yes and no. On the one hand, at first glance, Dole has worse EBITDA margins and more leverage in its capital structure. But if we think about what direction these should trend in, I think that Dole has a reasonable chance of improving its margins (post-divestment of the vegetable business) and has been making good progress quarter to quarter in an effort to reduce debt on the balance sheet. So while Dole may be the ugly duckling of the peer group right now, I expect that discount to narrow over time. For these reasons, I rate shares as a ‘buy’ and would consider adding on weakness.