Is It Time To Take A Bite Of Mission Produce?

The good news about Mission Produce’s third-quarter results is that they do not mention inflation. That’s surprising because most S&P 500 companies today are either talking about the pressures of inflation on margins, the need to raise their own prices to offset inflation or both. The bad news is that a delayed harvest in California and Mexico as well as a relatively small average size within the Mexican crop had a negative impact on results. The $246.80 million in net revenue is up 4.4% over last year and beat the consensus by 150 basis points but may have been stronger if not for those issues. Revenue gains were driven by a 2% increase in volume coupled with a 2% increase in selling price.

Moving down the report, the company experienced a -7% decrease in gross profits due to a contraction of margin and incremental spending on infrastructure. The infrastructure spending is a net positive and will ultimately lead to either improved revenue, improved margin, or both in future quarters. The margin contraction is more worrisome and due to volatility in pricing over the past year. Worse, the company is expecting price volatility to continue and could compound issues relating to avocado size and ultimately impact full-year

Turning to the guidance, the company lowered its guidance for full-year revenue and earnings. The company is now looking for revenue in the range of $890 to $910 or -$10 million from the previous guidance. This compares with the consensus estimate of $907 and leaves $255.30 million for the company to bring in during the fourth quarter. While we expect to see the company’s business improve, we see downside risk in the numbers. Guidance is expecting sequential revenue growth of 3.5% at the high end of the range.

The analysts are bullish on Mission Produce but you have to take that rating with a grain of salt. Marketbeat.com’s data shows only one analyst note this year and none since the earnings report was released so we expect sentiment is much different than what the consensus rating implies. That said, the consensus price target of $19.40 is only a few percentage points above key support at $18 and suggests the stock is fairly valued at or near current levels.

Shares of Mission Produce are down more than 10% in the wake of the report and testing the key support level of $18. So far, support is holding up and the indicators suggest this will continue. Assuming support is able to maintain prices at $18, we would expect to see upward drift begin within the next couple of days and for this stock to be retesting the top of the trading range near $21 fairly soon. The company is experiencing some near-term headwinds in terms of market volatility, pricing, and Mother Nature but it’s still in good shape and should be able to bounce back to wider margins and stronger growth. If however, the $18 level fails to hold, this market will most likely go down to $16 and possibly down to $14 before the bottom is hit.

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