Call Options Or Put Options On Chiquita Brands (CQB)?

| May 9, 2012 | 0 Comments

CQB OptionsChiquita Brands International (CQB) markets and distributes bananas and other fresh produce worldwide.

They operate in three segments.  The Bananas segment sources and distributes bananas to retail and wholesale customers.  The Salads and Healthy Snacks segment sells ready-to-eat salads and other single-serve snacks to grocery stores and restaurants.  And the Other Produce segment sells fresh fruit and other vegetables in Europe and North America.

Here’s the thing…

Chiquita reported horrible first quarter earnings this week.  Yes, they have no bananas…

As you can see, CQB is down more than 30% today.  And the stock price has been cut in half from the February high.

Is this an opportunity to buy call options on CQB before it comes racing back?   Or is this the time to buy put options on CQB as it falls to new lows?

The bulls make a convincing argument…

Last quarter, Chiquita’s revenue fell 4% to $793 million and they lost $11 million or 24 cents per share.  A significant slowdown compared to last year when they had $824 million in sales and $24 million or 52 cents per share in profits.

Obviously, it was an ugly quarter.  However, if you dig a little deeper, the results aren’t as bad as they seem at first glance.

CQB’s business was hurt by a perfect storm of lower banana prices and higher fuel costs.  It goes without saying that falling sales prices and rising costs are bad for profitability.

But it’s unlikely to continue…

They’re already seeing the supply of bananas tighten in key growing markets like Ecuador.  As a result, the price of bananas is starting to climb.  And fuel prices are falling as oil prices fall below $100 per barrel for the first time in months.

What’s more, they incurred significant costs related to reconfiguring shipping in Europe and relocating the company’s headquarters.  If you exclude these onetime costs, CQB actually made 4 cents per share.

The bottom line is the worst is over.  And with the stock trading near the March 2009 lows, there’s significant upside with little downside risk.

But the bears have a compelling case as well… 

It’s true that CQB was hurt by a perfect storm of events.  But earning 4 cents per share after excluding onetime costs was still well short of the 32 cents analysts were expecting them to make.

What’s worse is management’s comments…  They said they expect the impact of higher fuel costs to carry through into the rest of the year.

Obviously, when management isn’t optimistic about a turnaround then there’s no reason for investors to think one is likely either.

At this point, the company doesn’t have a plan to revive growth or return value to investors with a stock buyback or a dividend.

Simply put, there’s no reason to own a stock when sales and profits are falling and management doesn’t have a plan to get things back on the right track.  And that could lead to further downside in the stock.

If you think the bulls are right, take a look at buying the CQB August 2012 $6 Call for around $0.55.

If you think the bears are right, take a look at buying the CQB August 2012 $5 Put for around $0.50.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.