In-House Cannabis Production And Dutch Cultivation Will Expand Global Reach

Key Takeaways

• Strategic in-house manufacturing and international expansion may boost earnings and margins through improved product quality and higher market prices abroad.
  
• Significant investments in new facilities and operational optimizations aim to increase production capacity and profitability, enhancing growth prospects.
  
• Operational inefficiencies and external regulatory risks could impact net margins and income, while international expansion poses execution risks affecting future earnings.

Catalysts

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

• Village Farms International has been strategically moving its extraction and vape manufacturing capabilities in-house in 2025, which could enhance product quality and improve profit margins, ultimately boosting earnings.
  
• The company is focusing on international growth, as exports to medical cannabis markets like Germany, Australia, and the U.K. grew 113% year-over-year in Q4 2024, with potential for continued expansion, positively impacting revenue and margins due to higher market prices compared to Canada.
  
• The development of a second cultivation facility in the Netherlands, which will quadruple production capacity, represents a significant investment in the international recreational cannabis market, expected to drive future revenue growth.
  
• Initiatives to optimize Canadian operations could lower costs and improve efficiency and profitability, contributing to potential increases in net margins and earnings.
  
• The strategic decision to prioritize high-margin, high-quality product offerings and move away from low-margin business areas may improve gross margins and profitability in the Canadian market.

Village Farms International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Village Farms International's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -10.7% today to 7.7% in 3 years time.
• Analysts expect earnings to reach $30.9 million (and earnings per share of $0.08) by about April 2028, up from $-35.8 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 8.6x on those 2028 earnings, up from -1.6x today. This future PE is lower than the current PE for the CA Food industry at 16.6x.
• Analysts expect the number of shares outstanding to grow by 1.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.27%, as per the Simply Wall St company report.

Village Farms International Future Earnings Per Share Growth

Risks

• The decision to write down $10.5 million of noncash inventory in Canadian cannabis due to quality issues could impact net margins and reflects potential operational inefficiencies.
  
• Uncertainty around the proposed Canadian and Mexican tariffs, if enacted, could increase costs and affect net income by necessitating price adjustments and operational shifts.
  
• The reliance on a strong market share in the highly competitive Canadian cannabis market may pose risks if future market conditions change adversely, potentially impacting revenue growth.
  
• The dependency on regulatory environments, such as excise tax reform in Canada, is a potential risk that could influence the cost structure and ultimately affect net income if conditions remain unfavorable.
  
• With the expansion into international markets underway, there is execution risk related to successfully scaling up operations in new regions such as the Netherlands, which could impact earnings if challenges arise.

Valuation

• The analysts have a consensus price target of $1.875 for Village Farms International 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 $2.25, and the most bearish reporting a price target of just $1.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $401.6 million, earnings will come to $30.9 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $0.51, the analyst price target of $1.88 is 73.0% 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.