Avocado Volume Declines And Asset-Light Shift Will Reduce Future Revenues

Key Takeaways

• Strategic shift to an asset-lighter model and avocado volume fluctuations may impact Limoneira's revenue, margins, and financing abilities.
  
• Expansion efforts and the Harvest at Limoneira development pose significant upfront costs and profitability risks, potentially straining cash resources.
  
• Expanding avocado production, strategic real estate ventures, and adopting an asset-light model contribute to Limoneira's revenue growth and financial stability.

Catalysts

Operates as an agribusiness and real estate development company in the United States and internationally.

• The strategic shift to an asset-lighter business model might impact long-term revenue streams and reduce asset-backed financial security, potentially impacting the company's ability to leverage assets for financing.
  
• Projected decrease in avocado volume for fiscal year 2025 due to the alternate bearing nature of avocado trees could reduce revenue and affect net income due to lower sales volumes.
  
• Possible lower avocado pricing in the next fiscal year compared to current year pricing environment due to international circumstances could further pressure revenue and margins.
  
• Expansion of avocado production by 1,000 acres over the next three years, while aiming to capitalize on robust consumer demand, involves significant upfront costs and risks associated with agricultural yield variability, potentially impacting short- to mid-term cash flows and profitability.
  
• Although extended Harvest at Limoneira development is expected to contribute to future proceeds spread out over the next 7 fiscal years, the up-front development costs and the time needed to realize these proceeds could strain cash resources and impact financial flexibility in the interim.

Assumptions

• Analysts are assuming Limoneira's revenue will grow by 11.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.9% today to 0.8% in 3 years time.
• Analysts expect earnings to reach $2.1 million (and earnings per share of $0.1) by about December 2027, down from $5.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 291.4x on those 2027 earnings, up from 87.3x today. This future PE is greater than the current PE for the US Food industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 3.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Risks

• The significant expansion of avocado production by 1,000 acres over the next three years in response to robust consumer demand may lead to increased revenues and profitability for Limoneira, particularly in the high-demand avocado segment. This strategic decision could also enhance the company's market positioning and long-term growth prospects.
  
• The success of Limoneira's real estate development joint venture, Harvest at Limoneira, especially in the current lower interest rate environment which has propelled steady home sales, could increase the company’s revenue streams and contribute positively to its bottom line, thus potentially boosting overall profitability.
  
• The company's ability to secure a 37% increase in the dwelling units for their real estate project, resulting in the approval to increase the total number of residential units from 1,500 to 2,050, unlocks additional value-creation opportunities. This expansion can significantly enhance cash flow projections and contribute to long-term financial stability and growth.
  
• Limoneira's strategic shift towards an asset-lighter business model, coupled with stronger cash flow projections from Harvest at Limoneira, has led to a reduction in net debt and an improved balance sheet. This financial strengthening could enable the company to pursue further growth opportunities, make strategic investments, and enhance shareholder value.
  
• The company's decision to delay the harvest of avocados to capture more favorable pricing, which significantly increased the volume harvested, demonstrates Limoneira's adept management and flexibility in operations. This tactical move, in response to market dynamics, suggests potential for optimized profitability and revenue in the agricultural segment, positively impacting net margins and earnings.

Valuation

• The analysts have a consensus price target of $25.33 for Limoneira based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $28.0, and the most bearish reporting a price target of just $23.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $259.3 million, earnings will come to $2.1 million, and it would be trading on a PE ratio of 291.4x, assuming you use a discount rate of 5.9%.
• Given the current share price of $26.68, the analyst's price target of $25.33 is 5.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.