Comment: Dole Food Co changes yet to bear fruit

By Chris Mercer | 3 January 2013

Investors concerned by Doles performance

Investors concerned by Dole's performance

Dole Food Co's share price nose-dive, following worse-than-expected earnings guidance, highlights that the fresh fruit and vegetable giant will have to work hard to rebuild confidence in 2013.

Having returned to profits in 2011, Dole held its share price up in the second half of 2012 by showing a decisiveness in its mission to return value to shareholders. Most prominently, a strategic review of operations led to the agreed sale of its global packaged food and Asian fresh businesses to Japan's Itochu for close to US$1.7bn.

Investors appeared pretty content with their lot, given that the company had only clawed itself out of the red a year earlier. The past 24 hours, however, highlight just how fragile Dole's position continues to be.
 
Its share price plunged as the firm was forced to put back completion of the Itochu deal, due China's competition officials dragging their feet. The deal is still expected to clear, but Dole cannot get on with chopping debt until it does.

In a second blow, and probably more serious, Dole issued below-par profits guidance for 2013. With 2012 figures yet to be released, the firm said it expects its new-look business to generate between $45 and $60m in profits from continuing operations in 2013.

"Dole provided 2013 guidance below our expectations," said analysts at Janney. Both Janney and BB&T Capital Markets reduced their forecasts as a result of Dole's statement.

"Excluding the new cost savings programme, we estimate management's 2013 guidance would imply the worst year for the pro forma company since 2006, when the EU market imploded in the wake of the elimination of the quota regime," said BB&T analysts.

They said that, excluding an expected $20m of cost savings, the company's 2013 guidance "equates to approximately $50-$70M below pro forma 2011 EBITDA and $25-$45M below 2012 estimated pro forma EBITDA".

The banana market is causing Dole particular problems, according to the company.

Around 90% of Dole's banana retail contracts in the US have a one-year duration, providing at least some insulation against the vagaries of market supply.

However, Dole's executive vice president, general counsel and soon-to-be COO and president, C Michael Carter, said: "Despite the tightening global supply, we continue to see aggressive contract negotiations in the North American banana market even though costs are higher, with some importers seeking to buy market share."

Still, there are reasons to be cautiously optimistic. Analysts at Janney and BB&T focus on tighter supply in the global banana trade. "We believe the strength seen in Europe (prices up mid-teens % year-on-year), which is typically a leading indicator for North America, suggests profitability should improve from these depressed levels," said Janney.

Returning to Dole's financial position, the firm said that proceeds from the Itochu deal - together with a $400m loan that has been newly agreed - would be used to virtually wipe its $1.7bn debt. The group anticipates being left with a net debt to EBITDA ratio of 1.8, which should significantly lower interest costs.    

There is some reason, then, to believe Dole's chairman and incoming CEO, David Murdock, when he says that he is "very optimistic about the long-term future of the new Dole". For the time being, though, the company looks more like a work-in-progress.

Sectors: Financials, Fresh produce, Mergers & acquisitions

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