LOCL - Local Bounti Vs. AppHarvest: Which Sustainable Farmer Will Grow Alpha?

Summary

• Local Bounti and AppHarvest are both US-based controlled environment agriculture companies that went public in 2021 through the SPAC phenomenon.
• Both companies have seen their valuations get significantly discounted over the last 12 months on the back of rising interest rates, continued net losses, and the risk-off environment.
• Cumulative cash burn from operations and capex requirements have placed the near-term future of both companies under uncertainty.

AppHarvest ( APPH ) and Local Bounti ( LOCL ), both US-based indoor farming companies, would spring on the stock market in 2021 on the back of a great SPAC wave. Their respective appeals were clear, the old system of farming was out of touch with sustainability, hence a controlled environment for growing produce would allow for a number of parameters to be optimized to have as little impact on the planet as possible whilst boosting production yields. AppHarvest and Local Bounti utilize farming techniques that use just one-tenth of the water of traditional farming, no pesticides, and allow for year-round growth with carefully placed energy-efficient LED lights. This works in a hybrid growing loop with the sun as both companies use large greenhouses to let in natural light, reduce energy use, embed lower operating costs and maintain high efficient production.

With Local Bounti down 80.4% over the last 12 months and AppHarvest down 57% over the same time frame, the positive vision of farming along more sustainable lines has met a cold and uncaring stock market. The reasons for the collapse are multifaceted. These remain largely unproven companies operating in a fringe but emerging market with still unprofitable unit economics.

Morehead, Kentucky-based AppHarvest, which is focused on growing tomatoes, cucumbers, salad greens, and berries, recorded a net loss of $24 million for its last reported fiscal 2022 third quarter. Hamilton, Montana-based Local Bounti grows herbs and loose-leaf lettuce and last reported a net income of $27.1 million for its fiscal 2022 third quarter. The question bulls are asking is what comes next. AppHarvest started off 2023 with a 131% rally against short interest that stands at nearly 25% of its outstanding shares. Local Bounti has fared worse with its commons down 31% year-to-date against a short interest of just 7.5%.

The current rally is likely being driven by a short squeeze and has placed into view the year ahead. Which will work out to be the better investment? Fundamentally, and against a world population that just crossed 8 billion, the need for better land use to meet rising food demand increasingly renders their business models critical. They both offer a future-proofing of agriculture against an increasingly unreliable and uncertain world. Droughts, flooding, and other extreme weather events are seemingly on the up from climate change. Hence, both businesses, if successful, would offer greater certainty within a currently unsustainable food system whilst also providing the US with better food security.

Volatile Revenues, Dwindling Cash, And High Cash Burn

Both companies have different growing seasons, hence, a trailing 12-month comparison of financials would be more apt. Local Bounti's TTM revenue at the end of its fiscal 2022 third quarter stood at $13.15 million. This was just ahead of AppHarvest whose TTM revenue for the same time period stood at $13.12 million. AppHarvest is currently underway with one of the largest simultaneous controlled environment agriculture buildouts in the US. The company is constructing a 165-acre four-farm network across Appalachia and started commercial shipments from a new 15-acre Berea Salad Greens farm in September last year.

Local Bounti is firing on all cylinders. The company recently signed a five-year offtake agreement with Sam's Club for its leafy greens from its new greenhouse facility in Byron, Georgia. This commenced commercial shipping during the third quarter with Local Bounti also currently undergoing preparatory works for another site in Mount Pleasant, Texas. This site will be comprised of a six-acre greenhouse facility and will follow a three-acre greenhouse currently being constructed in Pasco, Washington. The Pasco facility is set for completion in the third quarter of 2023.

Whilst Local Bounti and AppHarvest are currently underway with large buildouts of their production capacities, AppHarvest has had negative gross margins for most of its public life. TTM gross profit at the end of its last reported quarter was negative at $32.37 million compared to a gross profit of $2.5 million for Local Bounti over the same time period.

Alpha Is In Doubt

AppHarvest has generated negative gross margins for every single quarter since it started trading on the NASDAQ. This has driven outsized losses, with cumulative net losses for the last four quarters at $171 million. This is versus $112.8 million for Local Bounti over the same period. However, the story for both farming stocks is a fast-approaching liquidity gap with current cash and equivalents increasingly not sufficient to meet their current level of operational cash demands.

Local Bounti recorded a cash burn from operations of $10.3 million for its last reported quarter with capex at $15.4 million. This saw cash and equivalents end the quarter at $4.2 million, down from $22.7 million in the prior second quarter. However, restricted cash stood at $19.8 million as of the end of the quarter and the company still held roughly $34.4 million of undrawn capacity with Cargill.

AppHarvest's cash and equivalents as at the end of its third quarter came in at $36.2 million against capex of $34 million and cash burn from operations of $23.4 million.

Both companies have had to lean on dilution to raise liquidity but AppHarvest's average diluted shares are up around 140% since 2021. The company had approximately $25 million remaining on its credit facility as of the end of its third quarter and still had an at-the-market facility with Cowen. Local Bounti raised a $23.3 million PIPE investment from its existing investors subsequent to the end of its third quarter which when aggregated with their broader sources of funds adds up to $80 million of total liquidity. This compares to total liquidity including restricted cash of $83.7 million for AppHarvest.

Hence, outperformance in 2023 will be based on which company will be able to manage their liquidity position property whilst ramping up production at their facilities. Whilst I'm leaning towards Local Bounti due to its positive gross margins and a lower market cap of $105 million versus $151 million for AppHarvest, both companies should be avoided for now until earnings are more sustainable.

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