Calavo Growers, Inc. (NASDAQ:CVGW) has a strong growth potential going forward. One of the company’s main products is avocados, and the consumption of avocados by Americans has increased at a rate that’s nearly 10 times higher than the growth in the American population. Based on Calavo Growers’ future potential, I think that the stock would make a sound, long-term investment.
Calavo Growers has shown steady revenue growth over the last decade, but its earnings have been a little volatile. The company operates profitably with low debt levels and reasonable returns on equity, but its profit margins are fairly low averaging around 3%.
The balance sheet shows that the company does not carry any long-term debt and its total liabilities represent 29% of its total asset value. Calavo is lightly financed, which is something I personally like. As debt levels rise, so does the bankruptcy risk – especially for smaller-cap companies like Calavo Growers.
Calavo operates with minimal working capital (with a current ratio of 1.2), meaning that its short-term assets (such as cash and deposits) just cover its short-term liabilities (bills the company has to pay). Some companies like Calavo Growers are very efficient at managing their short-term finances and get away with low levels of working capital. Calavo has a history of operating with current ratios in the 1.1 to 1.3 range. Common business wisdom suggests that the company’s current ratios are too low and should be closer to 2. Personally, I’m comfortable with the company’s low current ratios as it has an established history of operating with minimal working capital without increasing its overall debt.
Based on earnings from net income (rather than operational), the 2020 forward PE multiple is 39x with a stock price of $93. The full-year trailing PE multiple is 50x and book value