LMNR - Limoneira: Setting Up For Another Trade

2023-09-09 02:57:35 ET

Summary

• Limoneira is a diversified citrus company with real estate operations and a focus on avocados.
• The stock has been volatile but presents a buying opportunity on the next leg lower.
• The company has improved its balance sheet and cash flow, and there is potential for growth in shares after a selloff.

Limoneira (LMNR) is a diversified citrus growing, packing, selling and marketing company with related agribusiness activities and real estate development operations. We have traded this stock previously in our service and publicly, with our last public trade netting gains of 30% , that we outlined last fall. In that company, we dubbed the company "The Citrus King," and we stand by that moniker. Now, it is not just Lemons, but avocados are another staple of the business. The stock has been a tough investment, but has been great to trade. And we think that on the next leg lower you can once again start buying for a trade. The company has some debt, but is battling inflationary costs quite well. We like the real estate profile and have seen improvement in cash flow. We think the stock can be bought into weakness for a run higher. Let us discuss.

The play

We like to give you the direct plays we are running. No guesswork. Here is how we would play the trade this time:

Target entry 1: $14.05-$13.75 (33% of a position)

Target entry 2: $13.00-$13.10 (33% of a position)

Target entry 3: $12.25-$12.50 (34% of a position)

Target exit: $15+

Stop loss: $11

Options consideration: While our options considerations are reserved for our investing group, we do see a lucrative put selling approach to define entry as likely, in tandem with a buy-write for income.

Discussion

This is our sample trade above, and can be heightened with options. Once again, with our style of trading, it is certainly possible that you only get one entry, and make a good profit. That is a high quality problem. We much prefer scaling in versus buying all at once. And as the stock pulls back following its just reported earnings, this name is ripe for a trade. Performance has been mixed, however.

In its just reported Q3 , the company actually beat consensus estimates on the top line but put out a lower than expected EPS figure. Make no mistake, it has taken a good three years for this company to recover from the pandemic, and then from a tough growing season in 2021, and then the high inflation year of 2022. It has not been easy, but has helped it be a good trading stock. That said, revenue fell year-over-year. Now, while the company still pays a dividend , the yield is 2%, and the dividend level has been held firm. In tandem with a buy-write, you can make some income here. Of course, the yield relative to cash or bonds is not that exciting. However, there is room for growth in shares after this next selloff. The company has increased the size of its acreage year after year, on average, but made strategic sales to improve the balance sheet. For years there was a ton of CAPEX spending and a good amount of long-term debt, about $129 million of it when we last covered the company. Now long-term debt is $40.7 million, compared to $104.1 million at that start of 2023, and $129 million a year ago. Debt levels less $11.0 million of cash on hand, show a net debt position of $30.2 million at quarter end. That is a big improvement.

There were a lot of positives in Q3, including the company seeing solid sales growth. Total net revenue was $52.5 million, compared to total net revenue of $58.9 million a year ago, down 10.5%. Agribusiness revenue was $51.1 million, compared to $57.6 million last year. Other operations revenue was $1.4 million compared to $1.3 million (that is specialty crops mostly). Of course, citrus drives a chunk of sales. Fresh lemon revenue fell to $24.2 million, compared to $27.8 million during the 2022 quarter. Volumes were down despite restaurant and food service demand being strong. Approximately 1.4 million cartons of U.S. packed fresh lemons were sold at a $17.92 average price per carton, compared to approximately 1.5 million cartons sold at a $18.39 average price per carton a year ago. So-called brokered lemons and other lemon sales were $8.8 million this quarter compared to $5.0 million last year.

Where the company really got crushed was in avocados, and it was primarily due to a huge decline in the pricing. That is the thing with commodity plays, the pricing matters so very much. There was just $3.5 million of avocado revenue compared to $12.6 million a year ago. Approximately 2.8 million pounds of avocados were sold at a $0.99 average price per pound, compared to approximately 5.7 million pounds sold at a $2.21 average price per pound.

Orange revenue fell as well, hitting $1.3 million, up from $3.7 million a year ago. Once again, volumes fell due to asset sales. The decline in volume really stemmed from the sale of the Northern Properties in the first quarter of fiscal year 2023, which helped improve the balance sheet, but has led to year-over-year comps weakening.

Looking ahead, we continue to believe that restaurant demand is back, and supermarket demand particularly for avocados will continue to grow. Pricing has hurt, and volumes suffered due to asset sales. And that is actually a reason we like this company. This company is constantly buying and selling property. You get exposure to not just the fruit side of the business, but also the real estate side. They have several joint ventures. They are developing and expanding acreage with their partners, while selectively selling off other pieces of land to fuel cash flow. As we look to the entire fiscal year the company expects fresh lemon volumes to be in the range of 4.7 million to 5.0 million cartons for fiscal year 2023, a reduction from 5.0 to 5.4 million initially sought. However, avocado volume has been approximately 3.8 million pounds in fiscal year 2023 so far, compared to previous guidance of 3.0 million to 4.0 million pounds. So they are ahead of the game there. And from the real estate, Limoneira expects to receive total proceeds of $115 million from Harvest at Limoneira, LLCB II, and East Area II spread out over seven fiscal years, with approximately $8 million received in fiscal year 2022, so expect a revenue ramp there.

From an earnings standpoint, EPS was just $0.02, missing by $0.13, on high operating costs, that are viewed as transitional. It is likely that EPS dips in the next two quarters, but keep a close eye on the real estate gains and pricing of the products. They drive the action.

Take home

Longer-term, we expect that shares will be revalued higher, but near-term, we expect shares will fall. We think you step in and buy as shares decline to execute another winning trade.

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