Transformative Financing And Texas Facility Changes Will Improve Operations

Key Takeaways

• Strategic financing and reduced debt enhance Local Bounti's foundation, supporting future growth and operational expansion.
  
• Optimizing product offerings and expanding distribution channels are expected to boost revenue and improve margins.
  
• Strategic recalibration and facility changes pose short-term revenue and efficiency challenges, while future growth hinges on successful acquisitions and cost optimization amidst rising labor costs.

Catalysts

Local Bounti Corporation grows and packs fresh greens in the United States.

• The recent transformative financing, which includes substantial equity investment and a significant reduction in debt, strengthens Local Bounti's balance sheet, providing a solid foundation for future revenue growth and potential profitability as the company expands its operational capabilities.
  
• The strategic reconfiguration of the Texas facility to accommodate high-value specialty greens like Arugula and Power Crisp is expected to optimize product offerings and align production with customer demand, which could enhance both revenue and margins.
  
• Expansion of distribution networks, particularly with major retailers like Walmart and new partnerships with wholesalers, is positioned to significantly boost sales volume and revenue, supporting overall financial growth.
  
• The installation of automated harvesting equipment is anticipated to drive operational efficiencies by reducing labor costs and improving margins, which supports the path towards achieving positive adjusted EBITDA.
  
• The industry trend towards controlled environment agriculture, coupled with Local Bounti's strengthened market position post-restructuring, presents an opportunity to capture increased market share and improve revenue as traditional agriculture faces ongoing challenges.

Local Bounti Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Local Bounti's revenue will grow by 48.5% annually over the next 3 years.
• Analysts are not forecasting that Local Bounti will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Local Bounti's profit margin will increase from -314.4% to the average US Food industry of 6.3% in 3 years.
• If Local Bounti's profit margin were to converge on the industry average, you could expect earnings to reach $7.9 million (and earnings per share of $0.6) by about May 2028, up from $-119.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, up from -0.2x today. This future PE is lower than the current PE for the US Food industry at 17.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Local Bounti Future Earnings Per Share Growth

Risks

• The company is in a phase of recalibration, specifically at its Texas facility, which resulted in a shortfall in fourth-quarter expectations and temporarily impacted revenue generation.
  
• Increasing labor costs associated with production ramp-up at the Texas and Washington facilities are impacting the company's gross margins, potentially hurting net margins.
  
• The strategic decision to reconfigure facilities and change product focus could lead to operational disruptions and reduced efficiency in the short term, affecting overall earnings.
  
• The company's future growth relies heavily on successful acquisitions and leveraging existing infrastructure, yet there's no guarantee these acquisitions will deliver expected capital savings or improve revenue rapidly.
  
• Despite improvements, the company's adjusted gross margin and profitability are contingent on scaling operations and optimizing production costs, which introduce risks if these initiatives do not progress as anticipated.

Valuation

• The analysts have a consensus price target of $7.5 for Local Bounti 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 $10.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $125.0 million, earnings will come to $7.9 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 11.4%.
• Given the current share price of $2.36, the analyst price target of $7.5 is 68.5% 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.