Asset Sales And High Expenses Will Pressure Future Earnings In Farmland Sector

Key Takeaways

• Concerns over farmland valuation, especially in California, could impact future revenue projections and growth opportunities.
  
• High G&A expenses and stagnant rents may pressure net margins and earnings, limiting financial flexibility and growth potential.
  
• Farmland Partners is enhancing financial health and shareholder value through debt reduction, asset sales, cost control, strategic land positions, and stock buybacks.

Catalysts

An internally managed real estate company that owns and seeks to acquire high-quality North American farmland and makes loans to farmers secured by farm real estate.

• Despite strong asset sales, there may be concerns about the long-term value appreciation of the underlying farmland, particularly with issues surrounding the valuation of California specialty crop assets. This could impact future revenue projections due to potential mispricing.
  
• The concentration and geographical focus of asset sales may impact overall portfolio strength, especially since valuable Delta region farms were sold. Investors might be concerned about impacts on net margins or future earnings due to a more constrained portfolio.
  
• With significant disposals in 2023, net income in 2024 has already shown a decline. Continued focus on asset sales to close the valuation gap may limit growth opportunities, thus impacting future earnings growth.
  
• The potential for flat or modest increases in rents reflects a challenging market environment for farmers, impacting projected revenue growth and putting pressure on the company's earnings.
  
• Continued high G&A expenses due to transaction-related costs, despite cost reductions, may squeeze net margins, especially in the absence of significant future asset appreciation or sales.

Farmland Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Farmland Partners's revenue will decrease by 16.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.3% today to 4.5% in 3 years time.
• Analysts expect earnings to reach $1.6 million (and earnings per share of $0.03) by about February 2028, down from $15.3 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 480.9x on those 2028 earnings, up from 36.8x today. This future PE is greater than the current PE for the US Specialized REITs industry at 25.5x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Farmland Partners Future Earnings Per Share Growth

Risks

• Farmland Partners has significantly reduced its debt, which can improve net margins and earnings by decreasing interest expenses and strengthening the company's balance sheet.
  
• The company has returned substantial value to shareholders through asset sales at significant gains, which can positively affect earnings and net margins if continued.
  
• Farmland Partners has implemented cost control measures and reduced operating expenses, potentially increasing net margins and profitability.
  
• The company has a strong position in high-value farmland areas like Illinois, which might support stable or increasing revenue and asset appreciation.
  
• Farmland Partners plans to use a portion of proceeds from recent sales for stock buybacks, which can enhance earnings per share by reducing the number of shares outstanding.

Valuation

• The analysts have a consensus price target of $12.5 for Farmland Partners based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $34.3 million, earnings will come to $1.6 million, and it would be trading on a PE ratio of 480.9x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $11.8, the analyst price target of $12.5 is 5.6% higher. 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.