Mission Produce has had an impressive run over the past six months as its shares have beaten the S&P 500 by 8.7%. The stock now trades at $14.47, marking a 15.2% gain. This was partly due to its solid quarterly results, and the run-up 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? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Mission Produce Will Underperform?
We’re glad investors have benefited from the price increase, but we don't have much confidence in Mission Produce. Here are three reasons you should be careful with AVO and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
With $1.39 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. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Mission Produce’s revenue to drop by 12.3%. This projection is underwhelming and indicates its products will face some demand challenges.
3. Low Gross Margin Reveals Weak Structural Profitability
At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.
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 11.9% gross margin over the last two years. That means Mission Produce paid its suppliers a lot of money ($88.07 for every $100 in revenue) to run its business.
Final Judgment
Mission Produce doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 20.3× forward P/E (or $14.47 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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