Dole Plc Stock: Bullish As Declining Debt Unlock Values

seekingalpha04-21

Dole PLC reported solid 2023 financial trends confirming the strength of the business and long-term outlook.Efforts to exit non-core assets and raise cash have helped to pay down debt and improve the ...

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The company recognized as a global leader in food categories of fresh fruit and produce has been challenged to deal with supply chain constraints, inflationary cost pressures, as well as a shifting post-pandemic consumer spending trends. The latest setback was an announcement to back away from the planned sale of its Fresh Vegetable Division on the threat the U.S. Department of Justice would attempt to block the transaction. Still, we're eyeing what remains solid fundamentals with some encouraging financial trends. We believe shares of DOLE offer good value at the current level and are well positioned to climb higher. Data by YCharts DOLE Financials Recap The story for DOLE in 2023 was an improvement of its financial performance compared to a more difficult 2022. Full-year revenue of $8.2 billion climbed by 2.8%, while the adjusted EBITDA of $385.1 million was 6.9% higher. Q4 results were more mixed with non-GAAP EPS of $0.16, ahead of expectations, but down from $0.18 in Q4 2022. Revenue of $2.1 billion was up 1.4% y/y, although slightly under estimates. source: company IR (annotation by author) A strong point for Dole has been its EMEA Diversified Fresh Produce segment with sales up 9% in 2023 and even 15% in Q4. Management explains efforts to push pricing have been well-received with margins also benefiting from easing input cost pressures. Q4 segment adjusted EBITDA of $32.6 million was up by 44% y/y. This has helped balance a weaker performance from the Fresh Fruit business where lower banana prices and a decline in pineapple volumes limited segment profitability. The berry category in North America was cited as a challenging area for the business. Overall, the takeaway here is the otherwise resilient operation with several moving parts managing to generate steady growth and recurring profitability. source: company IR A theme for Dole has been an effort to divest non-core assets in a strategy to drive further operational and financial efficiencies. We mentioned the deal to sell its free vegetable business has been canceled, but other transactions have gone through. The company raised $84 million in 2023 from asset sales with a plan to continue going forward. Into Q1 2024, Dole announced the sale of its 65% equity stake in \"Progressive Produce\" to the private equity firm \"Arable Capital\" for cash proceeds of $121 million. The upside here has been a steady decline in the company's balance sheet debt position. Dole ended 2023 with a net leverage ratio of 2.1x, down from as high as 3.6x at the start of 2022. We view this trend as a positive with the implication of supporting a higher valuation while also reducing the company's interest expense as a tailwind for earnings. source: company IR What's Next For DOLE? Comments from management during the earnings conference call projected optimism for a solid 2024 while acknowledging a complex macro environment. The official guidance is for full-year adjusted EBITDA \"in line with 2023 on a like-for-like basis\". What we like about DOLE is its unique positioning within consumer staples focusing on \"fresh\" fruits and produce which is in contrast to the bigger side of the sector that specializes in packaged or processed foods. By this measure, DOLE can be seen as a pure play on several high-level themes including a consumer shift toward healthier food options and what we believe should support a premium valuation. As it relates to valuation, DOLE trading at just 5 times 2024 management EBITDA guidance is at a large discount relative to sector peers. We can point to Fresh Del Monte Produce Inc (FDP) as comparable trading at a 6.4x multiple on the same metric. Packaged foods names like The Kraft Heinz Co (KHC) or Tyson Foods Inc (TSN) trade at nearly double the premium closer to 10x. Keep in mind that DOLE pays a quarterly dividend of $0.08 per share which currently yields approximately 2.7%. Data by YCharts Final Thoughts We rate DOLE as a buy with a price target for the year ahead at $15.00 implying a 6.5x EV to forward EBITDA multiple as a better reflection of fair value. The bullish case for DOLE is that its effort to deleverage with the ability to generate stronger profitable growth going forward should all the valuation spread to a narrower higher as a catalyst for the stock. In terms of risks, a deeper deterioration of the economic outlook would likely hit demand as an operational tailwind with a downside to current earnings estimates. Weaker-than-expected results can open the door for a bigger selloff. Monitoring points over the next few quarters include the trends in margins, cash flow, and updates on the asset sale pipeline.  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