Two good reasons to buy Chiquita Brands

June 20, 2010

As you may recall, I recommended Chiquita Brands a couple of months ago, and since then it has gone down from 15.17 to 13.58 today, or down about 10%. So, not really my best work, I suppose, but an economic crisis in Europe, where Chiquita Brands performs 40% of  its operations, would naturally dampen enthusiasm for the share price. However, Chiquita did reiterate its $100-120 million estimate for next year’s earnings during their latest conference call, which at current prices translates to a P/E ratio of 5, although to be fair that projection was before the sovereign debt panic and the Euro hitting 1.2o. But, even if the company misses that estimate by a full 50% an investor at these prices would acquire a kosher 10% return on his or her money.

This view was echoed in an interview published by The Wall Street Transcript, where Scott Mushkin, a senior research analyst at Jeffries & Company, concluded that, based on current prices, “you are getting the company for the value of the salads business, and so you’re getting the banana business for free right now,” and that the euro situation has largely been priced into the company.

Now, value investors are noted for being able to operate independently of Wall Street opinion, but it is still gratifying to me to receive some confirmation.

Furthermore, Chiquita has been paying down debt at a fairly rapid rate, as total liabilities shrank $160 million in 2009 and $240 million in 2008, which is acting to improve their interest coverage ratio, which improves their credit rating and cost of borrowing and also enhances the safety of equity holders. They are also benefiting from Europe’s liberalizing of their banana tariff scheme.

And, as a final recommendation of Chiquita Brands, on June 3rd the company’s CEO, Fernando Aguirre, announced that he had acquired 40,905 shares of Chiquita Brands, and the transaction code on the announcement was “P”. “P” is what you want to see; it stands for “purchase”, as opposed to a grant from the company or some other method of acquisition. “P” means that the CEO purchased the stock with his own money. And as Peter Lynch noted:”  There are many reasons why insiders sell, but only one reason insiders buy.”

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