Over the last six months, Mission Produce’s shares have sunk to $12.61, producing a disappointing 6.7% loss - a stark contrast to the S&P 500’s 8.3% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Mission Produce, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Mission Produce Not Exciting?
Even with the cheaper entry price, we’re cautious about Mission Produce. Here are three reasons why there are better opportunities than AVO, plus one stock we’d rather own.
1. Fewer Distribution Channels Limit Its Ceiling
With $1.25 billion in revenue over the past 12 months, Mission Produce is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers. On the bright side, it can grow faster because it has a longer list of untapped store chains to sell into.
2. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products, has a stronger brand, and commands pricing power.
Mission Produce has bad unit economics for a consumer staples company, signaling it operates in a competitive market and lacks pricing power because its products can be substituted. As you can see below, it averaged a 11.6% gross margin over the last two years. That means Mission Produce paid its suppliers a lot of money ($88.41 for every $100 in revenue) to run its business.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Mission Produce historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.6%, lower than the typical cost of capital (how much it costs to raise money) for consumer staples companies.
Final Judgment
Mission Produce isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 17.6× forward P/E (or $12.61 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We’re pretty confident there are superior stocks to buy right now. Let us point you toward our favorite semiconductor picks and shovels play.
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