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Subject:  Fresh Del Monte Produce Inc. (FDP) - PART 4 Date:  9/30/2004  8:14 PM
Author:  DCFNewbie Number:  981 of 1264

Fresh Del Monte Produce, Inc. (NYSE:FDP)

4) Operational Growth/Risk


The market is clearly knowledgeable of the risks that FDP presents. It doesn't necessarily mean that they are correctly priced in, but it does mean that the low P/E is there for logical reasons.

Those reasons include:

- Fluctuations in yearly earnings

There is not much FDP can do to solve this, except increasing diversification. It's somewhat similar to portfolio management. If a certain company is overweighted in your portfolio it will obviously potentiate increasing volatility. In this case bananas are the overweighted asset in FDP's portfolio. FDP has managed to increasingly reduce the impact of bananas on the overall revenues (now stands at 34%). Still, anything above 20% will be objectively harmful to the company in the long term. Investors will not appreciate higher reliance on bananas. Other production risks like weather, are obviously, unavoidable. Higher operating margins associated with the sale of pre-packaged produce will somewhat reduce these swings.

- Current and future lawsuits

Lawsuits are abundant in FDP's pass. By employing over 25,000 workers directly and indirectly in dozens of countries, FDP is subject to a large number of personnel related lawsuits. Those lawsuits include the use of harmful pesticides and intimidating tactics to discourage unionization. Also, a lawsuit persists regarding FDP's acquisition by the IAT Group. The affect that future losses might have on shareholders is unknown.

- Majority shareholders benefited in detriment of the minority shareholders

This is obviously a common scenario. A public company whose majority ownership belongs to a reduced number of insiders is potentially insecure to minority shareholders. There hasn't been past evidence of either violent equity dilution or any other tactic to harm small investors. The current 3.0% dividend is actually very shareholder-friendly.

- Possibility of failed integration of current and future acquisitions

This is pretty self-explanatory. If FDP doesn't manage to seemingness integrate all these acquisitions into the pre-existing structure, no added value will be created. Thankfully management has, time and time again, shown technical competence in accomplishing these integrations. Mohammad has addressed several times this issue and has satisfactorily explained how future integration will occur, and how operating efficiency will be obtained in the acquired operations.

- Inability to repeat past success regarding the introduction of new products

Fresh Del Monte Pine Apple Gold was a very successful product. Still, it was launched in 1996 and, since then, FDP hasn't been able to launch a similar product. It is unclear if future efforts will be developed to try and replicate that success. Further GM products would be very important for FDP's future since, not only do they present a much more interesting gross margin, but they also allow a much greater leveraging of the Del Monte brand.

- Inability to market new DME brands

By acquiring Del Monte Europe, FDP has also acquired a porfolio of brands related to products that it is inexperienced in marketing. Juices, canned produces, snacks, DME had a much more diversefied business than FDP. Restructuring that business out of technical bankruptcy might present a problem.


There are several factors that might potentiate abnormal, unpredicted growth. Those factors are mostly associated with management. Mohammad Abu-Ghazaleh has several things going for him. First, the Abu-Ghazaleh have been involved in the commerce of produce since the middle of the 20th century. Mohammad grew up vising plantations and learning all the aspects of the industry, closely following the family's business. Furthermore, he seems competent not only at acquiring business but mainly in integrating those businesses with ongoing operations. He is known by those that have worked closely with him for having superior negotiation skills.

In addition to that, it is common knowledge that he will go to great lengths to get the best deal possible (also with visible negative consequences).

However, there must be no doubt that, by acquiring FDP shares, an investor is actually acquiring a piece of Mohammad Abu-Ghazaleh. The two entities cannot, at this point in time, be detached. Furthermore, the fact that right now the Abu-Ghazaleh family owns 55% of the FDP is probably positive for the small shareholder. By having full control of the company and by having such a large part of his personal fortune invested in FDP, small shareholders are guaranteed super-human like effort by insiders to grow the company. That is helped by the low P/E ratio. By having such unrealized potential, it becomes less likely that management will attempt to "cash out" at current value, specially since other competitor's P/E ratios are so much higher.

So, objectively, what is FDP's growth dependent on?

- More diversification in the produce offering
- Further acquisitions of DME related companies (ex: DME Pacific)
- Optimal integration of current acquisitions (ex: DME Europe)
- Dissipation of further lawsuit related penalties
- Good implementation of the pre-packaged fresh produce strategy worldwide
- Optimal leveraging of the Del Monte brand in introducing new GM products

Essentially, all these are associated with less earnings volatility and substantial revenue growth. FDP has, in the past, showed ability to grow on both fronts. In 2000 they even had a few quarters of negative earnings, still, even then revenue never stopped growing, and product diversification was increasing. That has, historically, been the norm.

Next section: 5) Establishing Price Target and/or exit conditions


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