LMNR - Limoneira: Forward-Looking EPS Prospects Continue To Put Pressure On Share-Price

2023-12-02 01:42:12 ET

Summary

• Limoneira's stock has shown some positive movement in November, but strong buying volume has been lacking.
• The company's restructuring efforts bring leverage, but the success of the business is still heavily dependent on lemon sales and pricing.
• We suggest eliminating the dividend due to negative earnings and the need to preserve cash in case a turnaround is not imminent.

Intro

We wrote about Limoneira Company ( LMNR ) back in late May of this year when we were optimistic that the company's Q2 numbers could add to the stock's momentum at the time. Shares had bounced off their December'2020 lows with aplomb and had gained approximately 30% in value over the following 5 months. Furthermore, given how technical charts are predictive, we assumed that investors were beginning to price in the ramifications of a much lighter asset model lending itself too much improved streamlining efforts where marketing & sales initiatives are to be at the forefront.

If we look at Limoneira's long-term technical chart below, shares have been caught in a long-term trading range between approximately $11 a share & $25 a share. Once again, as noted above, investors stepped in to buy shares at those December lows last year, but the sizable bottom-line GAAP miss in early June this year took the wind out of the Limoneira's sails. The bottom-line miss in Q2 was unfortunately followed by a further earnings miss in Q3 . Although November has been a solid month thus far for Limoneira stock, strong buying volume has been absent in this latest rally. Suffice it to say, there is every opportunity now that shares could revisit their December lows last year, which means long-holders should expect volatility over the near-term.

Restructuring Gives Limoneira Leverage

Although Limoneira's ongoing restructuring brings leverage (in terms of economies of scale) to the business, the income statement at least over the near term will be predominately governed by the volume of lemons sold and at what price. Here is where Limoneira has the least control. In Q3, for example, we saw how above-average rainfall in California resulted in a delay in the harvest overall and poorer quality lemons in certain batches. This piece of the puzzle is crucial to Limoneira's success, where climate change remains a risk, especially if weather conditions become even more unstable going forward.

Dollars from asset sales have predominantly been directed to reducing debt, which is encouraging. Lower interest expense means that the lion's share of EBIT can drop to the bottom line. With margins so low in this business, interest coverage ratios are watched very closely. Management has earmarked a further $50 million of asset sales to be undergone over the next nine months, which means the company's present $40.7 million of debt can soon if wiped out if needs be.

Further initiatives that have freed up cash have been the ending of the pension plan & the decision to bring the farming operations in Cadiz to a halt. Having far fewer obligations means that the likes of Limoneira's agency & grower partner businesses can prosper if trading conditions indeed stack up. As we see below however, concerning Limoneira's margins, we need to see product being turned over at scale to improve the low margins Limoneira continues to struggle with.

Dividend Should Be Eliminated

Given the company's negative earnings in each of the last two quarters (Usually the best quarters of the year), we do not see the point in continuing with the $0.075 dividend that is paid every quarter. Given the company's present growth problems where forward-looking revisions continue to be dialed down, wouldn't it be better to preserve this cash in case a turnaround is not pending? We state this because since operating cash flow came in negative over the past four quarters ($8.7 million), it was Limoneira's asset sales that funded almost $6 million of dividend payments over the same time frame. Although revisions have stabilized somewhat in recent weeks, they are still very much in negative territory. It is also important to remember that the company's one-off asset sales will eventually not be able to boost non-operating earnings. Furthermore, on this point, there is no guarantee that the company's remaining assets will be sold at the price points the company wants. Suffice it to say, cash remains king at present, so a dividend suspension seems the right move for Limoneira at this present moment in time.

Conclusion

To sum up, although November has been a good month for Limoneira stock, strong buying volume has not accompanied the upmove in earnest. Furthermore, the stock's long-term technicals, negative earnings plus negative EPS revisions point to more volatility over the near term. We rate the stock a 'hold' at this juncture, where long-investors must continue to take a long-term view. We look forward to continued coverage.

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