Market spotlight: Banana producers

In the first quarter, Chiquita Brands, the No. 2 banana producer in North America, swung to a better-than-expected profit as it raised prices. Banana sales rose 12 percent to $584 million, helped by tight supply and a weak dollar. In 2006, 59 percent of sales came from outside North America.

For rival Fresh Del Monte Produce Inc., first-quarter profit rose 23 percent to beat Wall Street expectations, aided by higher banana selling prices. Banana sales rose 18 percent but total revenue missed expectations.

Of the two rivals, Morgan Stanley analyst Vincent Andrews favors Fresh Del Monte for its more diversified products, exposure to emerging markets and more compelling stock price.

Fresh Del Monte's stock, which closed at $30.63 Friday, is off 8 percent since the start of the year, but it's up nearly 29 percent over the past 52 weeks. Meanwhile, Chiquita's shares, which ended at $23.22 Friday, are up 31 percent so far this year and have gained 43 percent over the past 52 weeks.

Andrews also expects North America banana pricing dynamics to continue improving "after years of uncooperative industry competition where retailers have enjoyed 60 percent gross margins selling bananas and manufacturers struggled to earn mid-single digit gross margins." Banana pricing rose 3 percent in 2007 and is up 18 percent year-to-date. He expects price increases of 7 percent in 2008 and 6 percent in 2009.

In addition, he believes a reduction in the European Union banana import tariff is increasingly likely.

Wachovia Capital Markets analyst Jonathan Feeney, who rates Chiquita "Outperform," says U.S. banana companies have imposed surcharges because of the tight supply. He expects the company will "continue pulling the pricing lever" to offset higher costs.

About 75 percent of bananas come from Latin America, Feeney says. In the Dominican Republic, a top exporter, about half of plantations were damaged during the 2007 hurricane season.

"As long as supplies remain so tight, we expect both Chiquita brands and the industry to pass on the costs," Feeney writes.