AgroFresh Solutions (AGFS) – How Do You Like Them Apples
AgroFresh Solutions is an industry leader in providing data-driven specialty solutions aimed at enabling growers and packers of fresh produce to preserve and enhance the freshness, quality, and value of their produce.
They are able to accomplish this with its flagship product, SmartFresh Quality System, a freshness protection technology proven to maintain firmness, texture, and appearance of fruits during storage and transport.
The SmartFresh technology’s active ingredient, 1-methylcyclopropene (1-MCP), is a simple hydrocarbon molecule that allows it to interact with the ethylene receptors of the fruits. The SmartFresh product is a sugar-based powder formulation which is dissolved in regular tap water releasing the 1-MCP in the storage room. It permeates the air and interacts with the ethylene receptors on the fruit, blocking them temporarily until the fruit comes out of the storage facility or the refrigerated environment.
On average, this stock trades around 50 option contracts per day, but In last Friday’s trading session, we noticed some unusual call buying in the October 7.5 Calls for 1.36 – 1.55. If we take a look at the company’s Q1 earnings report, we will be able to understand what the potential catalyst is.
The company reported that its Net Sales increased 15% Y/Y with sales of SmartFresh, Harvista, and apples making up 60% of the growth, with the largest contributions coming from Brazil and Chile. The other 40% of growth came from crops other than apples, such as pears, flowers, bananas, and persimmon.
However, the first quarter and the first half of the fiscal year aren’t the key to its full-year earnings. For example, in 2016, Q1 generated only 17.8% of full-year sales, while the first half was responsible for just 29.3%.
CEO Jordi Ferre said on the conference call, “Since our business is more heavily weighted towards the second half of the calendar year, we are working diligently to ensure we sustain our success over the remainder of the year.”
This is because AgroFresh is still largely reliant on the apple harvest in the fall in the Northern Hemisphere.
According to the US Apple Association, the United States has 7,500 apple producers who, collectively, grow 240 million bushels of apples on average each year on 322 thousand total acres of land. While apples are grown commercially in 32 states, the top 10 producing states are Washington, New York, Michigan, Pennsylvania, California, Virginia, North Carolina, Oregon, Ohio, and Idaho. AgroFresh has stated that WA, NY, and MI are the 3 states that matter the most for them.
While consumers see apples in their grocery stores all year round, the Northern Hemisphere’s apple season is typically from as early as July to as late as November. The peak of the apple season is September and October.
A year ago, on the company’s Q2 call, they were only able to provide an apple crop forecast as of June. Ultimately, as Q3 rolled around, the apple crop that was forecasted at 11% growth was reduced to 3% growth. In addition, increased competition for its SmartFresh product caused a sales shortfall. These negative highlights caused the stock to lose nearly half its value.
The company was not able to say much about the Northern Hemisphere’s apple crop in its Q1 earnings release in May. However, searching the USDA website allowed me to find the most recent Apple Processing Report (Shown Below). From what I see, total apple shipments are higher year over year with Washington and Michigan specifically showing increased shipments vs 2016.
Final Comments
The only sell-side analyst I show covering this stock is Citigroup’s Daniel Jester, who has a Neutral rating after downgrading it last November after disappointing Q3 results.
As stated toward the beginning of this report, AgroFresh is heavily reliant on the Northern Hemisphere’s apple crop in the second half of the year. We will need to keep a very close watch on any commentary coming from CEO Jordi Ferre or any other c-suite member. At this time, the best way to keep tabs on the crop is through the USDA website.
