End of Week Thoughts

Dole IPO disappoints but thesis remains intact

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I’ve decided to make this week’s End of Week thoughts open to all via my Substack site rather than just to current email subscribers given what’s happened this past week with the Dole IPO.

Rather than do the usual end of week round-up, this is a longer piece focusing on Dole’s IPO which frankly has been disappointing. As I write this, Dole is trading down ~7% from it’s IPO price of $16/share in what has been a very downbeat first day of trading. However all is not lost as for reasons I’ll outline below I still believe Dole’s stock is now deeply undervalued and represents a compelling value situation within a 12-24 month time horizon (as I outlined in my original underwrite).

The disappointment stems from the cut-price offering for the IPO. The original offering was expected to be for ~26m shares at $20 - $23/share. Over the course of the week, the pricing was cut back to $16 - $17, or a ~25% price reduction, falling short of the minimum valuation floor requirement agreed between Total Produce and Castle & Cooke (David Murdock’s holdco for Dole Foods). This resulted in TP and C&C mutually agreeing to waive the valuation floor and C&C’s secondary sale requirements under the transaction agreement to allow the IPO proceed on the reduced valuation.

Last night the IPO priced at the bottom of the range at $16/share, with 25 million shares being offered, raising $400m in gross proceeds for Dole Plc. The net of all this is that Dole went public at an implied market cap of ~$1.5bn, or a ~$480m / 24% reduction to the original targeted valuation of close to $2bn at the $21.50 midpoint of the original price range.

So this prompts two questions:

1. What happened that caused the price cut?

2. Was/am I wrong with respect to my original thesis?

1. What Happened With the Pricing?

Addressing the first question, the main reason I’m hearing from various sources is that the sheer volume of IPOs this week (and indeed YTD) has resulted in IPO fatigue and/or reduced appetite from institutions, which in Dole’s case resulted in investors pushing for a discount. This makes sense when one considers that in the US alone, IPOs have raised $89bn YTD in 2021, +232% vs PY, and are already at a record level in terms of funds raised. Indeed IPO issuance for this year is expected to surpass the full-year all-time high of $97 billion raised in 2000 amid the dot-com boom according to Renaissance Capital.

Notably, this past week alone IPO issuance was $10.3bn, with a further $2bn of issuance to follow in the coming weeks based on Renaissance Capital data:

Source: Renaissance Capital. Table totals $10.3bn.

It’s also worth highlighting that the biggest IPO this week was the much touted Robinhood flotation, which also came in at the bottom of its price range and disappointed on first day of trading, dropping 8% yesterday.

Stepping back from the noise, based on various anecdotes I’m hearing there are 7 possible reasons or factors behind the disappointing Dole IPO result:

1. IPO volumes resulting in generally reduced institutional appetite as outlined above. Indeed CEO Rory Byrne referenced this specifically today.

2. Institutions pushed for discount a discount on Dole to ensure they “lock in” some upside on Day 1, given the starting price is now so low (more on what the IPO implies for valuation below).

3. I’ve heard that the investor roadshow didn’t go particularly well, with investors not convinced about Q1 FY21 performance disclosed in the F-1 registration statement, with the view that the strong performance reflected temporary inflationary tailwinds rather than earnings power.

4. It's midsummer, the market is entering a quieter period as trading desks have switched off with people on vacation, reducing the level of interest in Dole (and IPOs generally).

5. Retail money was spooked by Total Produce’s share decline this week as it emerged appetite for Dole was weak and IPO pricing was being cut - I’m told retail selling was a factor in TP’s price dropping below the implied IPO price yesterday. This further “justified” the low end of the price range for the IPO.

6. There may have been some push back against the Dole IPO because investors don't like David Murdock and don’t want to see him get rewarded in the IPO given his past antics with the old Dole Foods business.

7. I cannot verify this, but I suspect there may be some fast money gaming going on, with TP shares being driven down at the IPO, thereby maximising the potential for easy gains once the dust settles post-listing.

2. Is My Thesis for Dole Wrong?

Moving on to the second question - does the IPO outcome imply I am wrong in my original underwrite analysis? Only time will tell, but thinking through the above I don’t believe I am. Not yet anyway.

It’s worth noting that all the above factors (with perhaps the exception of #3) reflect current market technical considerations and/or sentiment, but NOT Dole’s fundamentals or long-term prospects. So I take some comfort in that. Would this IPO have succeeded on the original terms if it happened earlier in the year? Quite possibly but that’s a moot point now.

While I don’t believe my TP/Dole thesis has been disproven by the IPO terms, I am perhaps guilty of a sin of omission to borrow Buffett’s phrase, in that I overlooked how a hot IPO market and the midsummer timing was an obvious risk factor for Dole failing to meet the valuation floor (which I was so confident it would surpass). So I’ll add that to my personal log of investing oversights.

Whatever about the IPO pricing, one thing is now very clear - Dole is cheap. Very cheap. The $16 IPO price implied a market cap of $1.5bn and and EV of ~$2.9bn, for a valuation of ~7x LTM EBITDA before synergies and 6.6x post-synergies (which I believe will be realised given the level of integration already in place between the two companies since 2018). At the current trading price of $14.91 this afternoon, the implied valuation is 6.9x ex-synergies / 6.3x with synergies.

To put this valuation in perspective, closest US peer Fresh Del Monte currently trades at ~10x, despite its weaker competitive position vs. Dole (half the size of Dole in revenue terms) and its pretty poor performance record over the past 5 years.

Moreover, smaller niche peers Mission Produce and Calavo Growers currently trade at ~16x and 20x currently. My takeaway then? The Dole valuation makes no sense - its priced at the very bottom of any plausible value range, veering into deep value territory in my opinion and all driven by non-fundamental factors.

As a US-listed market leader, 2x greater than it’s nearest competitor with a diversified product offering, significant scale advantages, similar margins to peers and an iconic brand why should Dole not trade at least in line with lesser peers?

I could well be proven wrong, and something may emerge post-IPO that warrants a re-examination of the fundamentals but for now, I see no change in the facts that casts doubt over my original thesis. So Dole is even cheaper now than when I underwrote it and I still see significant upside over the next 12-24 months. Dole’s stock may fall further in what’s becoming a shaky market for IPOs but this reflects short-term noise rather than fundamentals. I expect Dole to stabilise in the coming months as it comes under US analyst coverage and becomes a candidate for inclusion in index funds and ETFs which will pull capital into the name.

For some the IPO has been a disappointment but I've never viewed Dole as an IPO "pop" play (my original memo indicated a 45% IRR over a 24 month timeframe). As Benjamin Graham has said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Dole just hasn’t been weighed properly yet in my opinion.

So while this end of week thoughts is a lot longer than usual, I wanted to clearly and honestly set out my view on the Dole situation to readers given the week’s events. Hopefully the above makes sense.

On a separate note, I’d also like to thank Edwin Dorsey of the excellent Bear Cave Newsletter for naming Value Situations among the 100 “Must Follow” Financial Twitter accounts this week - thanks Edwin!

Finally, as noted in Monday’s Idea Bench newsletter, I had intended to publish my next high conviction idea memo next week but given the additional time I’ve spent on Dole this week and the fact that I’m on vacation, I may push publication out to the following week. Let’s hope a catalyst doesn’t play out before then that renders my next idea redundant!

As always thanks for subscribing and reading, and please do get in touch with any thoughts or questions. And if you like this newsletter please share with friends and colleagues.

Until next time, have a great weekend.

Conor.