Thesis

My analysis argues that while Mission Produce, Inc.’s (NASDAQ: NASDAQ:AVO) latest results look solid on paper—EPS at $0.23, beating estimates by $0.20…

…and revenue hitting $324 million, blowing past expectations by over $93 million—the company’s got some real challenges.

Sure, they’re expanding globally and have top-notch ripening tech, making them a big player in the avocado game. But as of this writing, with pre-market data showing the stock surging up 19%, the sky-high P/E ratio and negative earnings growth throw up red flags. Bottom line: after weighing the pros and cons, I’m giving it a “Hold” because there are still too many risks on the horizon.

About Mission Produce, Inc.

Mission Produce, Inc., started in 1983 and based in Oxnard, California, leads the global avocado industry. They source, farm, package, market, and distribute avocados. They also offer mangos and blueberries. Their business is fully integrated, so they control everything from farm to delivery. This lets them supply top-quality fruit all year to customers in over 25 countries.

The company expanded its offerings to include mangos and blueberries, in addition to its primary product, Hass avocados, in 2021. It has packing facilities in the U.S., Mexico, and Peru, and sources from Chile, Colombia, and South Africa. Mission has 12 distribution centers in North America, China, and Europe, and offers ripening, bagging, and custom packing as well.

Note that AVO is a relatively new public company, with Mission Produce having gone public in October 2020. Its CEO and founder, Stephen Barnard, is continuing to build the company and drive innovation in food distribution.

Mission Produce’s Performance

When looking AVO, it’s clear the company has struggled to keep up with market returns over the last four years: from November 2020 to September 2024, the stock gave an annualized return of -6.22%. In comparison, the S&P 500 (SPY) had an annualized return of 12.28%. In short, for investors since its IPO, AVO’s business hasn’t translated into shareholder value like the broader market.

The 1-year price return for newer investors tells a different story. As of now, AVO is up almost 20%, while most of its peers are struggling, except for STKL, which has surged with a 76% return.

Mission Produce Q3 2024 Earnings Highlights

Like its 1-year price return, Mission Produce reported Q3 FY2024 financial results that also told a story of solid growth. Revenue grew 24% year over year to a record $324 million. Adjusted EBITDA rose 49% to $31.5 million, driven by better gross profit margins. Gross profit increased by $8.6 million to $37 million, with margins improving by 50 basis points, from strong per-unit margins on avocado sales. Operational efficiency improved as well, with year-to-date operating cash flow up $62.7 million from a year earlier, which could be a sign of better management of operations and working capital.

Strong Demand and Price Strategy

Although El Niño meant that avocado production was lower than usual in Peru, higher prices compensated for the decline in production, and Mission Produce was able to use its network to source fruit across the world. For example, while the lack of Peruvian fruit put pressure on its farming operations, it created opportunities for its Marketing and Distribution teams to do what they were designed to do. That meant the strong demand from consumers, coupled with a low supply of avocados, kept prices high compared with the previous year. This lack of supply from both Peru and Mexico was a great chance for investors to see how well the Mission Produce team could satisfy global customer demand while also capturing those higher prices.

California Market Expansion

Put another way, the team broadened their sales (through the Oxnard Packing Facility). Their California market not only ended up being bigger than anticipated, about 25% to 40%, but it also made it possible to quickly pivot to the larger California crop to provide enough supply for customers. This captured a record-breaking, year-over-year market share of the California market (approximately 30%) from a far lower share in previous years.

This all led to more cash, the primary reason being they owed more money to California growers at the end of the third quarter than to any other region, allowing them more time to pay the growers versus other regions. So the longer pay terms helped them keep more cash around.

UK Expansion and Ripening Technology

Their UK facility has even made a profit in its first year, proving that their expansion plans across the globe are coming to fruition. Late last year, the company stated they were hoping to double their ripening capacity at Dartford. They would add more ripening rooms and a new facility for mangos as well as avocados, to keep up with demand as sales of both fruits in the UK continue to rise. Their technical know-how enables them to accelerate the ripening process while maintaining fruit quality.

All this is with the aim of increasing their market share, using their worldwide supply chain and ripening expertise, and developing long-term relationships with local suppliers. Looking ahead, it’s worth keeping an eye on this facility for growth opportunities for investors.

Precision Ripening Technology

You might be wondering what kind of “technology” is involved in ripening. Essentially, Mission Produce developed a system they call “Mission Control.” This tech gives them super-precise control over the avocado ripening process, improving quality consistency by 38% over more traditional methods. They built it with Cross Refrigeration, and it lets them fine-tune ripening conditions based on the season or the fruit’s quality.

It’s particularly useful for avocados such as early season and batched varieties that are more difficult to ripen. A similar technology is being rolled out across all their ripening hubs, including in the UK, where they’re looking to double capacity. They’re also rolling it out to mangos, bringing the same level of precision to them.

Not only does it aid in ripening, but it also reduces food waste by eliminating the need for destructive testing and boosts efficiency. Another tool Mission uses is the AVOS Mini, a device outfitted with AI to test for ripeness without harming the fruit.

Blueberry and Mango Expansion

In addition, the company furthered its diversification efforts as a strategy to help the company grow beyond the avocado business by rapidly expanding its blueberry initiative, which they see as a segment with potential for growth. Net sales in the Blueberry segment were $1.6 million compared to $1.4 million in the same period last year, and segment adjusted EBITDA was slightly negative at $0.1 million. Mango volumes increased by 40%, and revenue doubled to $14 million.

Free Cash Flow and Efficiency Savings

Mission racked up free cash flow of close to $30 million, and the management is optimistic that the strong performance will continue. It means that they have extra cash after covering their expenses, giving them more flexibility to invest in future projects should they arise. The company also wants to continue paying down its debt and should find its balance sheet in better shape by the end of this year.

Furthermore, they saved $2.5 million through efficiency improvements, which made their operations run smoother. Lastly, they’re curtailing excess spending. Planned capital expenditures for 2024 should come in at between $40 million and $45 million. That’s less than in previous years and demonstrates that they’re using their resources more efficiently.

Mission Produce’s Valuation

AVO’s blended (P/E) ratio sits at 47.66x, which is simply far too high because the company’s earnings growth rate is down 23.19%, making this high multiple difficult to defend.

The long-term debt-to-capital ratio is 32.94%, which isn’t terrible, but it’s not great either. And with the fair value P/E ratio around 15.00x, while the normal P/E sits closer to 38.63x, it tells me the current stock price is higher than it probably should be right now.

Bottom line: my biggest concern, though, is the negative earnings growth. Without growth, the company needs to lean on all those other strengths I just covered.

Mission Produce’s Risks & Headwinds

There were some challenges that affected the optimistic outlook. Due to El Niño and the lower-than-expected Peruvian harvest yields I brought up earlier, it led to a 40% drop in sales volume from owned farms in the International Farming segment.

Furthermore, revenues fell to $27.4 million from $38.2 million last year, while adjusted EBITDA decreased to $4.6 million from $4.9 million, showing continued weakness in the farming segment.

Avocado production from Mission’s owned farms is expected to drop significantly in Q4 FY2024, with volumes falling from 25 million pounds to well below the previous year’s 60 million pounds. While avocado prices are projected to stay 15% higher year-over-year, they are expected to decline sequentially, which may pressure profit margins. In the blueberry segment, despite higher volumes, lower average sales prices are likely to impact adjusted EBITDA in the fourth quarter. Concerns are also growing that sustained high avocado prices could hurt consumer demand, especially with tighter supply conditions.

SG&A expenses rose by $2.8 million, or 16%, mainly due to higher employee-related costs, which could put pressure on margins. Limited M&A activity points to a cautious growth strategy, possibly limiting expansion opportunities. And finally, while the step-down in CapEx shows more efficient spending, in my view, the projected $40 million to $45 million for FY2024 remains significant. It potentially reduces short-term flexibility for other growth initiatives, regardless of those favorable cash terms I mentioned earlier.

Mission Produce’s Rating

I’m initiating my coverage of Mission Produce, Inc. as a “Hold.” I think the company’s got solid growth potential with its global expansion and smarter operations, plus they’re branching out into mangos and blueberries. However, the high P/E ratio we looked at and negative earnings growth should raise some red flags for new investors tempted to take a bite here. With avocado production down and prices possibly scaring off consumers, I don’t see the stock being cheap enough to make it a buy right now.