International Demand Will Fuel Premium Cannabis And Greenhouse Expansion

Key Takeaways

• International and premium segment growth, combined with efficient cost leverage, positions the company for significant margin expansion and industry leadership.
  
• Strategic asset moves and partnerships support aggressive growth initiatives, with unique infrastructure providing fast access to emerging sustainable and cannabis markets.
  
• Heavy reliance on cannabis expansion, coupled with regulatory, environmental, and operational risks, could compress margins and threaten long-term profitability amid rising industry competition.

Catalysts

Produces, markets, and distributes greenhouse grown tomatoes, bell peppers, cucumbers, and mini-cukes in North America.

• While analyst consensus acknowledges Village Farms' international export strength, the extraordinary pace-700% year-over-year growth and early achievement of the full-year target in only half a year-suggests that international revenues could surge much faster than expected, especially as more EU and global markets open and demand outstrips Village's current supply.
  
• Analysts broadly agree that gross margins can be maintained or modestly improved, but with international sales driving product mix toward premium, higher-margin segments and additional volume leveraging fixed costs, Village Farms is positioned not just to reach but to decisively break through its current margin targets, potentially creating industry-leading net margin expansion.
  
• The strategic privatization of produce assets and formation of the Vanguard partnership provides both non-dilutive capital for reinvestment and a platform for future M&A or roll-up opportunities, enabling Village Farms to aggressively pursue acquisitions or growth projects that can boost top-line revenue and long-term earnings, all while expanding its access to alternative protein and sustainable produce markets.
  
• Village Farms' unmatched greenhouse scale and proprietary agri-tech position it to lead as consumer and retailer demand rapidly shifts toward year-round, locally-grown, sustainable products, offering potential for Village Farms to capture expanding wallet-share from major grocers and food service channels, directly enhancing produce segment sales and profitability.
  
• The company's vast existing greenhouse footprint in the U.S. and Canada provides a unique, instant-on expansion capability if U.S. cannabis policy liberalizes; this optionality places Village Farms in a rare position to immediately capture first-mover advantage and scale in what is expected to be the world's largest legal cannabis market, setting up a transformational, long-term earnings and revenue inflection point.

Village Farms International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Village Farms International compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Village Farms International's revenue will decrease by 4.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -1.7% today to 16.7% in 3 years time.
• The bullish analysts expect earnings to reach $49.5 million (and earnings per share of $0.24) by about August 2028, up from $-5.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, up from -50.0x today. This future PE is lower than the current PE for the CA Food industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Village Farms International Future Earnings Per Share Growth

Risks

• Intensifying competition and potential oversupply in key cannabis markets-highlighted by management's own comments about many new entrants in international markets and ongoing supply-demand volatility in Canada-could force pricing pressure and reduce Village Farms' revenue growth and net margins in future years.
  
• Over-reliance on cannabis as the company's main growth driver, especially as Village Farms has divested most produce operations and continues to invest heavily in cannabis capacity, exposes the business to risks from ongoing regulatory uncertainties and pricing compression in the cannabis sector, which could negatively impact overall revenue and long-term earnings.
  
• Heightened exposure to unpredictable climate and environmental threats-including climate change and weather volatility impacting existing and future greenhouse operations-could increase input costs and reduce agricultural yields, leading to persistent margin pressure and threatening long-term profitability.
  
• The need to comply with evolving ESG regulations and consumer preferences (such as demand for locally-grown or organic products), as well as tightening standards in export countries like Portugal, may necessitate ongoing capital investments and operational changes, negatively affecting free cash flow and potentially eroding profitability.
  
• Limited adoption of automation and dependence on scaling existing greenhouse infrastructure-rather than building new, highly automated facilities-could hinder operational efficiency, constrain economies of scale, and prevent Village Farms from sustaining the elevated net margins reported in recent quarters as the industry becomes more technologically advanced.

Valuation

• The assumed bullish price target for Village Farms International is $4.5, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Village Farms International's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $4.5, and the most bearish reporting a price target of just $3.25.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $295.5 million, earnings will come to $49.5 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $2.57, the bullish analyst price target of $4.5 is 42.9% higher.
  
• 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.