The Russell 2000 Index (RUT), a crucial barometer for small-cap stocks, has been making headlines with its impressive rally. Investors are anticipating that the Federal Reserve's expected interest rate cuts will benefit smaller companies, which often carry higher debt-to-equity ratios. That's why the shift into small caps from mega-cap tech stocks began in July, driven by promising June inflation data that supporting the case for lower rates.
In particular, Morgan Stanley’s (MS) U.S. equity strategists recommend adding small-cap growth stocks to portfolios, anticipating that the rate cuts will favor these names over their value-oriented counterparts.
Morgan Stanley’s global director of research, Katy Huberty, says that growth-oriented small caps, which are more sensitive to changes in capital costs, have outperformed as treasury yields decline. Looking back, small-cap growth stocks have historically tended to outperform when the Fed starts cutting rates.
Notably, Mission Produce, Inc. (AVO), a leading avocado producer and Russell 2000 component, has already racked up a 15% rally in the past month, and still has double-digit upside potential, according to analysts. With rate cuts on the horizon, now could be an ideal time to scoop up small-cap growth stocks like AVO for substantial gains.
Let’s take a closer look.
About Mission Produce Stock
Mission Produce, Inc. (AVO), headquartered in Oxnard, California, is a global leader in sourcing, farming, packaging, and distributing avocados, mangoes, and blueberries. Valued at $790 million by market cap, it offers various services, including ripening, packing, logistical management, and market insights to its clients.
While the stock has corrected 13% from its May peak of $13, AVO is still up 11.6% on a YTD basis. Over the past month alone, shares of Mission Produce rallied 15.8%, outperforming the iShares Russell 2000 ETF’s (IWM) gains over the same period.
From a valuation standpoint, AVO is currently priced at 70.44 times forward earnings, which is a premium to its sector median and its own historical average. However, the stock is trading at 0.83 times sales, which is lower than not only its industry peers like Limoneira Company (LMNR), but also its own five-year average of 1.05x.
Mission Produce Exceeds Q2 Earnings Estimates
On June 6, Mission Produce reported its fiscal Q2 2024 earnings results, which topped Wall Street’s forecasts on both the top and bottom lines. While its net sales rose 34.6% year over year to $297.6 million, exceeding projections by 31.4%, non-GAAP EPS of $0.14 defied expectations for a quarterly loss.
Mission Produce’s gross profit rocketed 71.3% to $31 million, fueled by stronger per-unit margins and higher avocado sales, with blueberries adding to the boost. The company exited the quarter with cash reserves of $46.2 million, up from $42.9 million as of October 31, 2023. For the six months ending April 30, operating cash flow surged to $12.9 million, a stark contrast to the $26.1 million used in the year-ago period, thanks to stellar performance and working capital management.
Looking ahead, Mission Produce forecasts a rocky fiscal Q3 2024. Warm El Niño temperatures are set to slash their Peruvian avocado yields by over 50%, hurting exports and fixed cost absorption. Despite higher pricing, profits in the International Farming segment are projected to take a hit. Overall, industry volumes might drop by 10% to 15%, mainly due to an early end to the Mexican season and a weak Peruvian harvest. Capex is projected between $40 million and $45 million for blueberry joint venture growth.
Mission Produce’s cost optimization initiatives aim for $10 million in savings for fiscal 2024. With a diversified global network and a top-notch sourcing team, it is set to overcome crop shortages and meet demand, even during Mexico’s off-season.
Analysts tracking Mission Produce expect the company’s profit to reach $0.16 per share in fiscal 2024, up 14.3% year over year, and grow another 50% to $0.24 per share in fiscal 2025.
What Do Analysts Expect for Mission Produce Stock?
On May 17, Lake Street Capital Markets initiated coverage on Mission Produce stock with a “Buy” rating and a price target of $15 – also the Street-high target price – which represents expected potential upside of 34.5%.
In a note to clients, the brokerage firm said that AVO seems to have hit an EBITDA inflection point, with a similar inflection point expected soon for free cash flow.
Analysts are optimistic about Mission Produce stock’s prospects, with a unanimous “Strong Buy” rating from the two in coverage. The mean target price of $14.50 indicates an expected upside of 28.7% from the current price levels.
