Executive Summary / Key Takeaways

• A Transformed Business Model: Calavo Growers has fundamentally reshaped its operations through Project Uno ($46M in annualized savings achieved), strategic divestitures of non-core assets ($83M Fresh Cut sale), and a sharpened focus on higher-margin prepared foods, creating a more resilient earnings profile less dependent on volatile fresh commodity markets.

• Prepared Segment Inflection: The Prepared segment's gross margin expanded from 12% to 25% year-over-year in Q3 FY2025, with sales growing 40% and gross profit surging 201%, demonstrating that the company's value-added strategy is gaining traction and becoming the primary profit engine.

• Fresh Segment Headwinds Create Temporary Margin Pressure: Q3 FY2025 Fresh segment gross profit declined 32% due to $4.2M in FDA detention costs and the termination of the Tomato Suspension Agreement, masking underlying operational improvements and creating a potential earnings recovery story as these discrete costs normalize.

• Regulatory Overhang Remains Material: A $160M Mexican tax assessment and recent FDA detention hold highlight the persistent regulatory risks inherent in cross-border produce operations, representing the primary threat to the transformation thesis and requiring careful monitoring of legal resolutions.

• Valuation Balances Risk and Opportunity: Trading at 10.5x EV/EBITDA with a 3.9% dividend yield, CVGW offers a reasonable entry point for a company executing a multi-year turnaround, with the critical variable being management's ability to sustain Prepared segment momentum while stabilizing Fresh segment margins.

Setting the Scene: The Avocado Platform's Strategic Evolution

Calavo Growers, founded in 1924 in Santa Paula, California, has spent a century building a global leadership position in avocado sourcing, packing, and distribution. The company makes money through two distinct business models: the Fresh segment, which sorts, packs, ripens, and ships whole avocados, tomatoes, and papayas; and the Prepared segment, which manufactures guacamole, avocado pulp, and other value-added products using ultra-high-pressure technology that ensures food safety without preservatives.

The fresh produce industry operates on razor-thin margins, with profitability driven by sourcing efficiency, quality control, and the ability to manage perishability. Calavo's place in this value chain is as a critical intermediary between growers in California, Mexico, Peru, and Colombia and retail/foodservice customers in North America. The company's competitive moat has historically rested on its diversified sourcing network, ripening facilities, and long-standing grower relationships that ensure year-round supply.

However, the industry structure is changing. Consumer demand for healthy, convenient foods has created a premium market for prepared avocado products, while supply chain complexity and regulatory scrutiny have increased operational risks. Calavo's strategic response has been to pivot from a commodity-driven model toward a value-added platform, leveraging its sourcing advantages to feed higher-margin prepared products. This transformation, launched with Project Uno in Q3 2021, represents the central narrative for investors today.

Business Model & Segments: A Tale of Two Strategies

Calavo operates through two reportable segments that reflect fundamentally different economic models. The Fresh segment, renamed from Grown in Q1 FY2025, is a volume-driven business where margins oscillate with supply availability and pricing volatility. The Prepared segment, which now focuses exclusively on guacamole products after the Fresh Cut divestiture, is a value-added business where margins expand through operational leverage and brand premium.

The Fresh segment's economics are straightforward: procure avocados at farm-gate prices, add value through sorting, ripening, and logistics, and sell to retailers at a markup. In Q3 FY2025, this segment generated $155.9M in sales at an 8% gross margin, down from 11% in the prior year. The decline wasn't due to structural deterioration but rather discrete costs: a $4.2M hit from an FDA detention hold on Mexican imports and an 18% price decline in tomatoes following the termination of the 2019 Tomato Suspension Agreement. These one-time factors masked the segment's underlying ability to maintain per-case profitability within management's $3-4 target range.

The Prepared segment tells a different story. By processing avocados into guacamole and other products, Calavo captures significantly more value per pound of fruit. In Q3 FY2025, this segment achieved a 25% gross margin on $23M in sales, with gross profit increasing 201% year-over-year. The segment benefits from lower fruit input costs, operational efficiencies from Project Uno, and the ability to command premium pricing through branded products like the Old El Paso partnership launched in Fall 2022. This margin expansion demonstrates the strategic logic of the transformation: when avocado prices fall, Prepared segment margins expand, creating a natural hedge against fresh commodity volatility.

Historical Context: From Diversification to Focus

Calavo's current positioning emerged from a series of deliberate strategic decisions over the past decade. The formation of Avocados de Jalisco in August 2015 marked the beginning of a major Mexican expansion, providing access to additional growing regions. The Jalisco packinghouse's certification for U.S. export in August 2022 was pivotal, giving Calavo more sourcing optionality and reducing dependence on traditional Michoacán supply.

The real transformation began in Q3 2021 with Project Uno, a targeted initiative to deliver $70M in annualized EBITDA improvement within two years. By Q4 FY2022, the company had achieved $46M in savings through pricing optimization, labor efficiencies, and cost controls. This operational discipline enabled the company to weather extreme market volatility in 2022, when Mexican avocado supply fell 15% and prices swung by over $20 per carton in a single month.

Parallel to Project Uno, management executed a portfolio pruning strategy. The Q4 2022 sale of Limoneira (LMNR) shares for $18.5M provided liquidity to pay down debt. The Q1 2023 exit from the non-core salsa business freed resources for guacamole growth. The August 2024 sale of the Fresh Cut business for $83M represented the culmination of this strategy, allowing Calavo to focus entirely on its avocado platform. These moves weren't just financial housekeeping; they represented a fundamental shift from a diversified produce company to a specialized avocado platform.

Technology & Differentiation: The Infrastructure of Quality

Calavo's competitive advantages rest on three pillars: global sourcing, processing technology, and distribution infrastructure. The company's ability to procure fruit from California, Mexico, Peru, and Colombia creates a supply resilience that smaller competitors cannot match. This matters because avocado supply is highly seasonal and weather-dependent; multi-region sourcing ensures year-over-year availability and reduces the risk of crop failures.

The ultra-high-pressure processing technology used in the Prepared segment represents a genuine technological moat. This method eliminates pathogens while preserving taste and texture without chemical preservatives, enabling a shelf-stable premium product that commands higher margins. While competitors can replicate the technology, Calavo's scale and integration create cost advantages that are difficult to match.

The ripening and packing facilities provide another layer of differentiation. By controlling the ripening process, Calavo ensures consistent quality for retail customers, reducing waste and building brand loyalty. This infrastructure investment translates into tangible benefits: higher customer fill rates, lower rejection rates, and the ability to service premium retail channels that demand reliability.

Financial Performance: Evidence of Strategic Progress

Calavo's financial results provide clear evidence that the transformation is working, despite near-term headwinds. For the nine months ended July 31, 2025, consolidated net sales increased 7% to $523.8M, driven by a 6% increase in Fresh segment sales and 10% growth in Prepared. More importantly, SG&A expenses decreased 19% year-over-year, reflecting Project Uno's impact on overhead efficiency.

The Prepared segment's performance is particularly compelling. Nine-month sales grew 10% to $53.4M, but gross profit surged 27% to $13.4M as margins expanded from 22% to 25%. This leverage effect demonstrates the power of the value-added model: incremental revenue flows through at high incremental margins. The segment benefited from an 11% increase in pounds sold, continued operating leverage, and lower fruit input costs.

The Fresh segment's challenges are temporary but material. Nine-month gross profit declined 6% to $38.6M, entirely due to the $4.2M FDA detention cost. Excluding this discrete item, gross profit would have been essentially flat despite tomato market disruption. The segment's ability to maintain per-case profitability near the $3-4 target range during supply volatility validates management's operational capabilities.

Cash flow generation remains robust. Operating cash flow was $19.2M for the nine-month period, up from $13.6M in the prior year. The company ended the quarter with $63.8M in cash and only $50.5M drawn on its $75M credit facility, providing ample liquidity to fund working capital and strategic investments. This financial flexibility is crucial for managing the seasonal nature of avocado procurement.

Competitive Context: The Middleweight Advantage

Calavo occupies a unique middle ground in the produce industry. Mission Produce is a pure-play avocado competitor with greater scale and vertical integration, generating $357.7M in quarterly revenue versus Calavo's $178.8M. AVO's 10% year-over-year growth in Q3 FY2025 outpaced Calavo's consolidated growth, reflecting its supply chain control. However, AVO lacks a meaningful prepared foods business, leaving it exposed to fresh commodity volatility without the natural hedge that Calavo's Prepared segment provides.

Fresh Del Monte and Dole are larger diversified players where avocados represent a smaller portion of the portfolio. FDP's Q3 FY2025 gross margin of 11.2% exceeds Calavo's consolidated margin, reflecting scale advantages in procurement and distribution. However, these giants move slowly and cannot match Calavo's specialized focus on avocado innovation and customer service. Calavo's 99% customer fill rate in its RFG business, achieved through operational improvements, demonstrates the advantage of focused execution.

Calavo's differentiation lies in its integrated fresh-to-prepared pipeline. While competitors sell either fresh avocados or processed products, Calavo captures value at both stages. This matters because it creates customer stickiness: retailers can source both whole fruit and prepared products from a single supplier, simplifying procurement and ensuring quality consistency. The Old El Paso partnership exemplifies this advantage, leveraging a recognized brand to drive prepared product growth while utilizing Calavo's sourcing infrastructure.

Outlook & Guidance: The Path to Margin Stability

Management's guidance reveals a clear roadmap for the next two years. The company estimates Prepared segment sales will reach approximately $115M in fiscal 2026, implying continued double-digit growth from the current $53.4M nine-month run rate. This growth will be driven by expanded sales to existing customers and new customer wins across retail and foodservice, both domestically and internationally.

In the Fresh segment, management expects per-case margins to remain at the low end of the $3-4 target range as California and Peru seasons begin, acknowledging ongoing volatility. However, volume is expected to increase in line with supply from primary sourcing regions. This guidance is realistic rather than conservative; it reflects an understanding that avocado markets remain subject to weather, trade policy, and supply-demand imbalances.

The strategic focus remains on operational efficiency and customer expansion. The company recently went live with a new transportation management system to improve freight costs, consolidated distribution centers to streamline operations, and converted over 50% of Prepared revenue to contractually committed pricing windows. These initiatives will enable faster reaction to market dynamics and provide more predictable margin outcomes.

Risks & Asymmetries: What Could Break the Thesis

Three material risks threaten the investment thesis, each with distinct mechanisms and probabilities. The Mexican tax assessment, totaling approximately $160M USD, represents the most significant financial risk. The SAT has placed liens on $26M of fixed assets and $1M of bank accounts, and while Calavo received a favorable ruling in August 2025 recognizing its maquila status , the SAT has appealed to the Mexican Supreme Court. If the assessment is upheld, it would consume nearly all of the company's cash and likely force a dilutive equity raise or asset sale.

The FDA detention hold, while resolved in September 2025, exposed the fragility of cross-border produce operations. The $4.2M cost incurred in Q3 FY2025 from a single detection of trace Imazalil levels demonstrates how quickly regulatory issues can erode profitability. A future detention hold, particularly one lasting multiple quarters, could materially impact both Fresh segment margins and customer relationships.

Supply chain dependencies create ongoing operational risk. The termination of the Tomato Suspension Agreement imposed a 17% anti-dumping duty on Mexican tomatoes, sharply raising costs and disrupting volumes. Similarly, the avocado weevil outbreak that temporarily paused a Mexican packinghouse in Q1 FY2025 highlights how pest issues can reduce supply and increase procurement costs. These risks are amplified by Calavo's smaller scale relative to diversified competitors, limiting its ability to absorb cost shocks.

On the positive side, several asymmetries could drive upside beyond management's guidance. The Old El Paso partnership is still in early stages; if it gains national distribution and strong consumer adoption, Prepared segment sales could exceed the $115M target. Additionally, if the Jalisco facility's full potential is realized, sourcing optionality could improve Fresh segment margins beyond the $3-4 target range. The company's net cash position and available credit provide firepower for strategic acquisitions that could accelerate the transformation.

Valuation Context: Pricing a Transformation

At $20.98 per share, Calavo trades at an enterprise value of $335M, or 10.5x TTM EBITDA. This multiple sits slightly above Mission Produce's (AVO) 10.2x EBITDA. The price-to-free-cash-flow ratio of 13.1x is attractive for a company generating $21.5M in annual free cash flow while executing a strategic turnaround.

The dividend yield of 3.94% provides income while investors wait for the transformation to fully materialize, though the 106.67% payout ratio raises sustainability questions. Management reduced the dividend in early 2023 as part of its fiscal discipline strategy, and further adjustments may be necessary if Prepared segment growth requires additional capital investment.

Relative to diversified peers, Calavo's valuation appears reasonable. Fresh Del Monte (FDP) trades at 8.6x EBITDA with lower growth, while Dole (DOLE) trades at 7.1x EBITDA with minimal margin expansion. The premium reflects Calavo's pure-play avocado exposure and prepared foods growth potential. However, the regulatory overhang from the Mexican tax issue likely constrains multiple expansion until legal resolution is achieved.

Conclusion: A Transformation at an Inflection Point

Calavo Growers has executed a remarkable transformation from a diversified produce company to a focused avocado platform with a growing value-added business. The evidence is clear in the numbers: Prepared segment margins have doubled, SG&A expenses have been cut by 19%, and strategic divestitures have generated over $100M in proceeds while focusing management attention on core competencies.

The investment thesis hinges on two variables: the sustainability of Prepared segment margin expansion and the resolution of regulatory overhangs. The Old El Paso partnership, operational efficiencies from Project Uno, and a growing customer base in deli grab-and-go provide multiple avenues for continued growth. Meanwhile, the Mexican tax appeal and normalized FDA relations could remove significant uncertainty, potentially unlocking multiple expansion.

The stock's valuation at 10.5x EBITDA appears to discount both the transformation's progress and the remaining risks. For investors willing to tolerate regulatory uncertainty, Calavo offers a unique combination of income (3.9% yield), margin recovery, and strategic focus in a growing category. The next 12 months will be critical: if management delivers on its $115M Prepared segment target while maintaining Fresh segment profitability, the market will be forced to re-rate this transformed avocado platform.