Bear of the Day: Calavo Growers (CVGW)

Zacks

Calavo Growers (CVGW) recently reported a big second quarter earnings miss despite strong top-line growth thanks to a significant decline in the gross profit margin.

This prompted analysts to revise their estimates lower going forward, sending the stock to a Zacks Rank #5 (Strong Sell).

With shares trading at a lofty 20x forward earnings, investors should consider waiting for earnings momentum to turn around before establishing a position here.

Calavo Growers, Inc. distributes avocados, prepared avocado products, and other perishable food products to food distributors, produce wholesalers, supermarkets, and restaurants. The company obtains avocados primarily from California, Mexico, and Chile. It was founded in 1924 and has a market cap of $401 million.

Second Quarter Results

Calavo Growers reported its fiscal 2013 second quarter results on June 5. Earnings per share came in at 19 cents, significantly below the Zacks Consensus Estimate of 39 cents. It was the company's second straight earnings miss.

Net sales rose 20% year-over-year to $166.4 million as Calavo packed and sold 40% more fresh avocado units. However, the company offered discounts in many cases, which led to a significant decline in the gross profit margin. For instance, gross profit declined from 10.6% in the second quarter last year to just 6.9% of net sales in the same quarter this year.

Estimates Fall

Following the Q2 miss, analysts revised their estimates significantly lower for both 2013 and 2014. This sent the stock to a Zacks Rank #5 (Strong Sell).

The 2013 Zacks Consensus Estimate is now $1.24, down from $1.50 just 30 days ago. The 2014 consensus is down from $1.68 to $1.51 over the same period. You can see this negative earnings momentum in the company's 'Price & Consensus' chart:

Another bearish signal for Calavo Growers is the Zacks Industry Rank. The 'Agriculture Operations' industry ranks in the bottom 5% of all industries at 253 of out 265.

Premium Valuation

Despite the negative earnings momentum, shares of Calavo Growers still trade at a premium valuation. The 12-month forward P/E ratio is 20, above its 10-year median of 16 and well above the industry median of 10. Its price to tangible book ratio of 4.7 is also well above its peers and its historical median.

The Bottom Line

Given declining earnings estimates and premium valuation, investors should consider waiting for the earnings momentum of this avocado company to turn around before establishing a position.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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