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Dole Stock: It’s a Fresh Fruit Salad, But Is It Cheap?

Suzanne McGee

It’s official: the outlook is turning softer for Dole (DOLE). The fruit and produce company just warned that its fresh-foods operations – soon to be the bulwark of Dole’s business, once a pending sale of its global packaged foods division is completed – are likely to see “declining earnings in a continued difficult economic environment.”

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But profits aren’t Dole’s only problem. Payments on the company’s rather hefty debt load – while declining – are still significant, and the rate at which interest expenses have fallen over the last year is dwarfed by the rate at which its cash reserves have declined. That’s not a good combination.

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DOLE Non Operating Interest Expense TTM Chart

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The big question hovering over Dole’s head is what the company will look like after it completes the sale of its Asian fresh foods business and its global packaged goods business to Japan’s Itochu. The $1.7 billion it will receive once Itochu gets the regulatory go-ahead to complete the deal will go a long way to pay down Dole’s debt and make the company look less like a risky, debt-laden enterprise. And Dole will be left with some attractive assets, including land in Hawaii, Ecuador, Costa Rica and Honduras.

But while Dole will emerge from the deal leaner and (potentially) meaner, the company’s current banana debacle serves as a reminder of the significant risks to which it will remain exposed. Its businesses now are confined to growing, transporting and selling fresh produce. And as Dole execs just reminded us all, the banana market, in particular, is “challenging” these days – even as costs have risen, importers are trying to buy market share so that even the tight supply situation caused by recent typhoons aren’t giving Dole’s bottom line a boost.

DOLE Net Income TTM Chart

That means it all comes down to what kind of profits Dole can extract from its remaining business. And the early signs aren’t encouraging. Even if Dole resolves the banana issue, the poorly-timed (for Dole) problem is a reminder to investors of the risks in investing in agricultural commodities, whose value can sink or soar based on unpredictable weather patterns as well as myriad other factors. To some extent, Dole’s packaged foods business served as a higher profit margins counterweight to that cyclicality.

Investors may be tempted to view Dole as a bargain-priced stock in light of the recent selloff that has knocked about 13.5% off the value of the shares since the final trading day of 2012. But trading at a PE ratio of about 12, based on trailing 12-month earnings, the company isn’t downright cheap, and analysts are tending to cut their rating on its shares. That means that even if you’re a believer in the long-term prospects for pineapples, bananas and other fresh fruit as North Americans try to start the year by adopting healthier eating habits, odds are that you’ll be setting yourself up for a bumpy and nerve-racking ride.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.

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