LMNR - Limoneira: The Citrus King

Summary

• Limoneira stock has been great for trading and we think you should consider scaling in on the next bout of weakness.
• Operating income increased over 200% and the top line jumped 20%, driven by record avocado revenues and increased fresh lemon sales in Q3.
• The real estate side of the business is helping cash flow.
• The One World of Citrus plan is increasing cash flow dramatically.

Limoneira ( LMNR ) is a diversified citrus growing, packing, selling and marketing company with related agribusiness activities and real estate development operations. Lemons and avocados are two main staples of the business. With the growing popularity of the high fat keto diet, avocado demand has surged. The stock has been a tough investment, but has been great to trade. We think on the next leg lower you start buying for a trade. The company has some debt, but is battling inflationary costs quite well. The company is upping avocado plantings and strategically selling certain assets to dramatically increase cash flow. That is one thing people do not realize about this company, it not only is a produce type company (and we love the mantra that people need to eat), but they also have a very lucrative portfolio of real estate assets. We think the stock can be bought into weakness for a run higher. Let us discuss.

The play

Here at BAD BEAT we like to give you the direct plays we are running. No guesswork. Here is how we would play this:

Target entry 1: $12.60-$12.80 (33% of a position)

Target entry 2: $12.00-$12.20 (33% of a position)

Target entry 3: $11.25-$11.50 (33% of a position)

Target exit: $15+

Stop loss: $9.90

Discussion

So there you have the way we would play this. It is possible you only get one entry, and make a good profit, high quality problem. You still made money. We like scaling in versus buying all at once. It is a big mistake to buy all at once in our opinion. This name is ripe for a trade. Performance has been strong.

The company had just started to rebound from the COVID crisis that had lasting impacts and things were seemingly about to be back to normal when the markets took it on the chin starting back in February of this year. It has been a long bear market. Inflation has been horrible, and food prices have rocketed higher. While labor costs and supply costs have risen for the company, the selling price of its products has been mixed, but the company is operating efficiently.

In its just reported Q3 , the company actually beat consensus estimates on the top and bottom line. After lots of damage to the earnings potential of the company from the pandemic, and then from a tough growing season in 2021, the company has bounced back (even though the stock really has not, though we are off the lows). Revenue jumped year-over-year.

While the company still pays a dividend , the selloff in shares has brought the yield to a respectable 2.3%. With bonds falling bond yields have risen so this yield is not impressive, but is a nice bonus for what should really be a growth company. The company has of course increased the size of its acreage year after year, on average, though is selling some now. For years there was a ton of CAPEX spending and a good amount of long-term debt, about $129 million of it.

There were a lot of positives in Q3, including the company seeing solid sales and earnings. Total net revenue was $58.9 million, compared to total net revenue of $49.1 million a year ago. A nice 20% jump! Agribusiness revenue was $57.6 million, compared to $48.0 million in the third quarter of last year. Other operations (like specialty citrus and other crops) revenue was similar to the prior fiscal year at $1.3 million.

Citrus drives a chunk of sales. Fresh lemon revenue rose to $27.8 million, compared to $24.4 million during the 2021 quarter. Volumes were up significantly with restaurant and food service demand being strong. While volume was strong, fresh lemon pricing was down. Further, supply chain and freight costs are up as is labor. That said, with fresh lemon pricing was down to $18.39 per carton from $21.34 average price per carton a year ago which was a bit of a surprise. But the volumes surged. The company sold 1.512 million cartons vs. 1.144 million cartons a year ago.

But growth was not only in lemons. The company saw a brand new record for avocado sales. Winning. In fact there was $12.6 million of avocado revenue, tripling from $4.1 million a year ago. This was due to a massive increase in volume and much higher pricing. Last year only 3.5 million pounds of avocados were sold, while this year volumes normalized and were 5.7 million pounds last year. However, pricing was up 91%. The average price per pound was $2.21 compared to a $1.16 average price per pound last year. The main reason for this was the lower sized avocado due to California droughts. This is a one-time headwind.

Orange revenue was strong as well, rising to $3.7 million up from $2.0 million a year ago. Volumes here were much lower than a year ago, but pricing skyrocketed. They sold 0.209 million cartons of oranges at a $17. average price per carton, compared to approximately 0.259 million cartons sold at a $17.88 average price per carton.

Looking ahead, we continue to believe that restaurant demand is back, and supermarket demand particularly for avocados will continue to grow. Inflation has pinched the consumer to a degree, but Avocados are more and more popular each year. Provided weather conditions are roughly normal, yields will improve. While the company cannot control congestion at ports, this has been a global phenomenon, and one which we believe will dissipate into 2022.

A landowner, and water rights are a future catalyst

This company is constantly buying and selling property. This is a reason to like the company. 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. One of the most bullish pieces of information that you need to know is that they have an extra 1,000 acres of non-bearing lemon groves that are estimated to become full bearing over the next four years, which will drive organic growth higher dramatically in the coming years. In total the company has over 15,400 acres of rich agricultural lands, real estate properties, and water rights in California and Arizona, as well as in South America in Chile and Argentina. The company estimates this is a fair-market-value of over $600 million. Water will eventually become a scarce commodity in our opinion, and it kind of already is. Having these land and water rights is a long-term catalyst

Good bottom line, near-term outlook cloudy

Operating income impressed as it increased by over 200% to $11.1 million, compared to operating income of $3.4 million a year ago. When we factor in the operational expenses of the company, Limoneira had $0.40 in EPS, doubling from last year. But with a tough set of pressures, for the year, the company could only breakeven, or see EPS up to $0.10. Pricing will matter here, and any further real estate moves could impact things. EPS could be higher depending. Volumes look to remain strong as a whole. The One World of Citrus plan for cost savings and efficiency and sustainability from tree to plate has not only been eco-friendly but is saving money. Despite the surge in volumes and revenues, expenses were up just over 2% year-over-year. This is also bullish.

Take home

Longer-term, we expect that shares will be revalued higher, as fundamentals are constantly changing in this fragmented industry. We really like the land side of the business long-term. Medium-term this is setting up as an easy stock to trade in our opinion. Buy on the next dip.

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