Harsh Times May Bear Fruit for Fresh Del Monte

I am not normally a fan of food distributors -- these companies have low gross margins and don't get high P/E multiples in the best of times. Yet I believe the current deflationary market and credit crisis may have some positive effects on Fresh Del Monte (FDP - commentary - Cramer's Take) and leave the company with a stronger market position and better earnings results.

With a well-known brand name that dates back to 1892, Fresh Del Monte is a worldwide producer and distributor of fresh fruit, vegetables, beverages and snacks. The company is a leader or top-tier competitor in a number of key produce markets such as bananas, pineapples, melons, tomatoes and grapes. Fresh Del Monte's fully integrated logistical network includes 21 owned and nine chartered refrigerated ships, 24 U.S. distributions centers and more than 40 distribution facilities in key markets throughout the world.

Fresh Del Monte recently produced solid 2008 third-quarter results, with a net sales increase of 10% on a year-over-year basis and gross margin improvement of 17% over the same period. Third-quarter earnings per share came in at 46 cents vs. 51 cents on about 9% more shares outstanding in the year-ago period. Keep in mind that the company has experienced enormous increases in cost over the last year as prices in raw materials, labor and fuel affect almost every aspect of Fresh Del Monte's business. However, these prices are now falling.

Fresh Del Monte is aggressively controlling costs through vertical integration while also entering new markets. During the second quarter, the company made the "Carabina" acquisition in Costa Rica -- the combined purchase of Desarollo Agroindustrial de Frutales and Frutas de Exportacion -- which substantially increases in-house banana production and helps capture additional margins by controlling the supply chain. The company is continuing to expand into the Middle East, with three distribution centers that are scheduled to open in Saudi Arabia over the next two years.

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At the time of publication, Gear had no position in the stocks mentioned.

Steve Gear was director of capital markets at Stockhouse.