Sunday, December 12, 1999
Chiquita upbeat on recovery
EU reform, Latin crop, banana prices could buoy stock
BY CLIFF PEALE
The Cincinnati Enquirer
Chiquita Brands International Inc. could recover enough next year to rescue a stock price sinking to historic lows, company executives insist.
The recovery could come through reform in the European banana market, allowing Cincinnati-based Chiquita to regain some of its lost market share there this year.
Or the push could be newly harvested bananas on Latin American farms ravaged by Hurricane Mitch, which cost the company $73 million in special charges last year.
More than one-third of the farms in Honduras have been replanted, and the company — the world's top producer, marketer and distributor of bananas — should start harvesting fruit there by February, said Steven Warshaw, president and chief operating officer.
The main factor even could be increasing banana prices in Europe and worldwide, helping not only Chiquita but the entire industry to recover from a yearlong slump.
But to investors who have seen the stock price drop from $50 a share in 1991 to less than $4 a share this year, news of a recovery will have to wait until the company's stock bounces back from a series of setbacks in the 1990s.
“It's been a distressful situation, but I find it hard to give up,” said John McMillin, an analyst at Prudential Securities who has been one of the more bullish on Chiquita stock for years.
Quota system blamed
Analysts trace most of the stock decline to the European quota system imposed in July 1993, which knocked the price from its high of more than $50 a share to the teens.
But since then, a worldwide softness in banana prices and several natural disasters, including Hurricane Mitch last year, have bedeviled the entire industry.
In a Yahoo.com chat room, frustrated Chiquita shareholders speculate that Chairman Carl Lindner will take the company private. Executives at the company discount that possibility, but admit that only profitable quarterly earnings will convince investors that Chiquita's long-term prospects are bright.
“I think the market is looking for an initial indication that the industry is settling at a better point,” Mr. Warshaw said. “The industry, as pained as it is with poor results ... is poised for a turn, and the changes should be visible in the short to medium term.”
Mr. Lindner, whose American Financial Group owns almost 40 percent of Chiquita's common stock, has purchased almost 2 million more shares in the last year. That includes about 1.7 million shares in March alone, just before the World Trade Organization approved U.S. economic sanctions against the European Union.
Some company officials called that a vote of confidence in Chiquita's long-term prospects.
But most outside stock watchers are less optimistic about the company's future. Without a change in the quotas that leads to significant relief in Europe, the upside in the stock is hard to find, they said.
“To get this thing going, it will take some resurgence in earnings,” said John Schmitz, vice president and director of equity strategy at Fifth Third Bank in Cincinnati.
“The following on the street is not that broad,” he added. “There just isn't much there on the company.”
The results did not improve during the third quarter. Chiquita lost $36.7 million, or 62 cents a share, and sales fell 10.3 percent to $567.2 million.
Several local investment pros remain skeptical about Chiquita and food companies in general because they are so vulnerable to low prices, defective product or swings in demand.
“Chiquita has its own set of problems,” said Terry Kelly of the downtown money-management firm Osborn & Kelly. “They would need some inflation to move their prices up and get their market going.”
Turnaround elements
Mr. Warshaw described several elements in the predicted Chiquita turnaround, including:
• New banana crops. Harvests of thousands of acres destroyed by Hurricane Mitch should produce revenue in the first quarter next year, Mr. Warshaw said. The company started replanting the Honduran farms in May.
• Lower costs. Bananas sold on the West Coast will come from Guatemala instead of Ecuador, cutting come costs and increasing the quality of the product, he said.
Chiquita has reduced the number of bananas it buys in Ecuador, and its long-term goal remains to cut sourcing in non-core countries to reduce costs, Mr. Warshaw said.
Chiquita rival Dole Food Co. made a similar move last month. The company said it would cut its losses and close banana operations in Nicaragua and Venezuela, cutting its fleet by seven ships and laying off 9,000 workers.
Chiquita officials would not comment on the Dole announcement. But Chiquita has steadily cut costs during the past five years by acquiring more of its own ships and other assets, while phasing out operations in what Mr. Warshaw called “non-core markets.”
Chiquita now owns about 16 of the 25-40 ships it operates worldwide at any one time, chartering the rest.
• A downsizing program. Announced in late September, the plan has produced some voluntary retirements and some layoffs, and is well on the way toward the goal of cutting 200 corporate and staff jobs, including more than 100 at the Cincinnati headquarters at Fifth and Sycamore streets, Mr. Warshaw said.
Chiquita took a $6 million charge to pay for the layoffs, but hopes to save $10 million to $15 million a year when it is completed.
• Resolving the fight with Europe. Chiquita's six-year battle with the European Union over banana quotas could produce some relief next year, Chiquita executives said. It only grew more contentious during the second quarter, when the EU riled Chiquita and others by allocating an unusually large number of banana licenses, depressing both prices and Chiquita earnings, Mr. Warshaw said.
The U.S. imposed almost $200 million in annual sanctions earlier this year, and the EU has proposed a six-year program to end the banana-licensing regime. But U.S. officials have said the proposal would not solve the central problem of how the EU will allocate the licenses.
The quota system favors bananas from former European colonies in the Caribbean and Africa, at the expense of Chiquita and other companies that operate in Latin America.
While Chiquita has expanded its canned-vegetable business, reform in Europe is the one long-term factor in raising the company's stock price, company watchers said.
“What took the stock price down was onerous rules in Europe,” Mr. McMillin of Prudential Securities said. “What will take it back up is reform. I just hope it's in my lifetime.
“I'd be happy if the stock got back to $10.”
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