Hawk Ridge: Calavo Growers A Buy On Avocado Tariff War?

Hawk Ridge Capital  thesis on Calavo Growers

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2016 Hedge Fund Letters

Calavo Growers is a cyclical, commodity processor of avocados trading at over 30x peak earnings and over 17x peak ebitda. As the business normalizes and overshoots to the downside – which we believe is in the process of happening right now – we think the stock is likely to decline substantially. We believe earnings will be $1.69 next year vs consensus of $2.30, driven by shortfalls relative to expectations in 2 of 3 segments. On this basis, at current prices, the stock is trading at nearly 40x our estimate of next years’ earnings vs the best peer (Fresh Del Monte) trading at 17x arguably peak earnings. We see 50 percent downside in the next 6 months if results normalize and investors better appreciate the headwinds facing the business.