Mission Produce has had an impressive run over the past six months as its shares have beaten the S&P 500 by 23.8%. The stock now trades at $12.30, marking a 28.5% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Mission Produce, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.We’re glad investors have benefited from the price increase, but we're cautious about Mission Produce. Here are three reasons why there are better opportunities than AVO and a stock we'd rather own.
Why Do We Think Mission Produce Will Underperform?
Founded in 1983 in California, Mission Produce (NASDAQ:AVO) grows, packages, and distributes avocados.
1. Less Negotiating Power with Suppliers
Mission Produce is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage. On the other hand, it can grow faster because it’s working from a smaller revenue base and has a longer runway of untapped store chains to sell into.
2. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.
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 10.8% gross margin over the last two years. That means Mission Produce paid its suppliers a lot of money ($89.23 for every $100 in revenue) to run its business. 
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Mission Produce historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.5%, lower than the typical cost of capital (how much it costs to raise money) for consumer staples companies.
Final Judgment
Mission Produce doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 28.3× forward price-to-earnings (or $12.30 per share). At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere. We’d recommend looking at The Trade Desk, the nucleus of digital advertising.
Stocks We Would Buy Instead of Mission Produce
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