LMNR - Limoneira: Rally Could Only Be Getting Started As We Approach Q2 Earnings

2023-05-30 14:54:21 ET

Summary

• Limoneira's shares have returned over 30% since December 2022 as the company transitions to an asset-light model.
• The company's long-term and short-term technical charts show bullish trends, backing up improved fundamentals.
• Limoneira aims to become a more efficient business, focusing on packing, marketing, and selling, with increased margins and stable earnings.

Technical Analysis

We wrote about Limoneira Company ( LMNR ) in December 2022 when we stated that the company's fiscal-2022 Q4 earnings report could potentially drive the stock forward. Although Limoneira reported an earnings miss in Q4-2022 followed by another non-GAAP miss in Q1 this year, the main item of focus for investors continues to be the company's ongoing transition and how this will affect Limoneira's earnings profile going forward.

Suffice it to say, as the company continues its transition to an asset-light model, investors continue to decipher how Limoneira's trading environment will change as a result. Before we get to the fundamental reasons why shares continue to rise (shares have returned 30% plus since our December-2022 commentary), let's go through the stock's technicals which are attractive, to say the least.

As we see above on Limoneira's long-term chart, and as we have mentioned in past commentary, shares have now jumped aggressively off long-term support (blue horizontal multi-year trend-line) plus also have rallied above their intermediate down-trending trend-line (red). Patterns (bouncing off multi-year support) many times repeat in long-term charts due to the fact that investor psychology in the main tends not to change. Therefore, recent technical developments meaningfully stack the odds in favor of a sustained move to the upside, where further evidence is seen on a more near-term chart as we see below.

Given the consolidation which took place prior to Limoneira's strong up-move in late January this year, we have every reason to believe that a breakaway gap was printed on the 31st of January this year. Breakaway gaps invariable take place after a long basing pattern and on strong volume. Furthermore, they usually mark the initial stages of a significant market move. The reason for the 10% spike in the share price at the time was due to the $100 million sale of the company's ' Northern Properties ' in Tulare County, California.

Therefore, with significant cash hitting Limoneira's balance sheet in recent months (and with more assets earmarked for sale as we see below), I continue to be attracted by what is coming down the track here. Why? Well, by doubling down (through much more aggressive investments) on growth areas, return on capital numbers should grow meaningfully in Limoneira.

Efficiency Is Key

Suffice it to say, by turning over capital much quicker due to much-improved productivity and packaging efficiencies and using far more fruit from its partners, Limoneira will be a far more streamlined operation where forward-looking returns will come off much less capital. A pristine balance sheet that soon will have no debt obviously significantly reduces risk, but how the company's core operating business revenue streams (Citrus & Avocados) will be set up is exciting and with good reason.

If we take the lemon side of the business for example and zone in on the sale of Northern Properties to Prudential Agricultural Investments, investors should note that Limoneira still has an interest in the property which is aligned with its new business model. This deal really exemplifies how Limoneira on the one hand is disposing of its assets but also continuing to reap the benefits of the acreage for its 'One World Of Citrus' initiative.

What we mean by this is that Limoneira will continue to provide farming services for a period of 12 months whilst also doubling down on the 'service' part of the business, which is key from an efficiency standpoint. To this point, the CEO, Mr. Harold Edwards said the following on how investors should view the sale of Northern properties as the roadmap now is packing, market & selling.

The structure of our Northern Properties deal with Prudential Agricultural Investments is a great example of the direction we are headed, growing the service part of our business as we focused on packing, marketing, and selling. And in return, you will begin to see meaningful improvement to our returns on invested capital with better margins, cash flow, and earnings that become a lot more stable and predictable over the next 12 to 18 months.

Therefore, as volumes increase from Limoneira's partners, market share gains should come as a result. On the flip side of volumes from lemons for example not coming in as expected, prices should rise to compensate for the lower production. Suffice it to say, it will be interesting to see how capital gets allocated going forward in Limoneira to see how efficient this model can become.

Value

At present, Limoneira's forward price-to-sales multiple comes in at 1.6 compared to a five-year average of 1.81. Furthermore, if we take into account the company's declining debt load, we see that the company's forward EV/sales multiple of 1.92 compares very well with the five-year average comparable of 2.59. Suffice it to say, with the company expected to be clear of debt shortly, that EV/sales multiple will become even more attractive, which is what we want to see. Remember, the success of Limoneira's new model is all about scale on the front end, so I believe the company's sales are undervalued, especially when one considers how cash flow and margins should benefit as a result.

Conclusion

Therefore, to sum up, Limoneira's bullish technicals on both its long-term and short-term charts demonstrate how the company's fundamentals are changing for the better. The new-look Limonera should be a far more efficient outfit, so let's see if it can live up to its billing. Let's see how Q2 earnings fare out in early June. We look forward to continued coverage.

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