Description

Summary: Limoneira (LMNR) is an agribusiness concern with significant ownership of land and water rights, mostly in California. The company is coming off a terrible 2019 in which its lemons and oranges suffered low prices and it experienced a crop failure in avocados. Lemon pricing, though, is now improving, which should have an immediate impact on LMNR’s profitability. Moreover, LMNR will begin to generate revenue from its housing project and new production coming online in the next two years. I think there is potential upside of 40% to about $30/share over the next year. 

Profile: Limoneira (which means “lemon lands” in Portuguese) is an agribusiness concern based in Ventura County in southern California which traces its history back to 1893. LMNR manages 15,700 acres of land on which it grows lemons, avocados, oranges, and other crops. LMNR is one of the largest lemon producers in the U.S. and the crop generates most of its revenue and income. LMNR also manages packing operations and is part of a joint venture to develop single-family homes on its land. LMNR produces and processes crops in California, Arizona, Chile, and Argentina.

Background

Limoneira traces its history to 1893, although it has expanded greatly in just the past 10 years. LMNR rather reluctantly, completed an IPO in 2010 after it surpassed 500 shareholders. At the time, a firm with 500 shareholders was required to file financials with the SEC. Soon after the IPO, Limoneira left the Sunkist cooperative in which it had been a member for more than 100 years, requiring the firm to do its own sales and marketing for the first time ever. In its first few years as a public company, some investors were attracted to LMNR as an investment due to its ownership of California land and water rights, potentially worth much more than the EV of the business. Over time, however, it became apparent that monetization of LMNR’s land and water was not the management’s priority and many investors lost interest. There’s more information on this topic in the prior write-up on the company on VIC by Woolly18 in 2014. I will discuss LMNR’s land assets, but my write-up will focus on its agricultural business, especially its lemon production.

Lemons

“When life gives you lemons…do not make lemonade as lemons have greater value in the fresh market.”

Limoneira is, primarily, in the business if growing lemons. In fiscal year 2019, lemons and lemon packing accounted for 87% of LMNR’s revenue. LMNR has operations in South America and grows lemons in three U.S. regions: central California (near Bakersfield), Ventura County, California (north of Los Angeles), and western Arizona (near Yuma). LMNR has greatly expanded its lemon production through a series of acquisitions, partnerships, and new plantings over the past decade. Since the IPO, LMNR’s lemon acreage has doubled while its acreage of other crops has increased just 10%. Moreover, LMNR has focused on lemons in its recent plantings. LMNR (citing USDA figures) estimates that its share of the U.S. lemon market increased to 9.5% in 2019 from 3.9% in 2011.

LMNR also has packing facilities for both its own crops and those of and third parties. In 2016, LMNR invested $26 mil. in upgrades to its 100-year old packinghouse in Santa Paula, California, which the company claims can now do three times the volume with 30% less labor. This facility is currently operating below capacity, so it will become more profitable as LMNR increases its production and brings in more third-party work. In addition, in 2018, LMNR acquired a packer called Oxnard Lemon for $25 mil. which specializes in organic lemon packing. The Oxnard deal increased LMNR’s packing capacity by about 50% (to 12 mil. cartons from 8 mil.) and generates $40-$45 mil. in additional revenue. As the facility is less than 50% utilized, it could generate as much as $100 mil. in revenue as LMNR increases production and brings in new third-party customers.

LMNR has gone international in the last few years, under a program it calls “One World of Citrus”. This program allows LMRN to serve customers in many parts of the world in all 12 months of the year. In 2014, LMNR invested in a citrus, packing, and marketing business in Chile. In 2018, it closed a $60 mil. secondary to increase its ownership in this business and to fund the acquisition and planned expansion of a citrus farm in Chile. In 2019, LMNR acquired majority control of a citrus concern in Argentina for $15 million. LMNR expects its total lemon production to increase to 8.7 mil. (3.9 mil. owned) cartons in FY20 from 7.5 mil. (3 mil. owned) cartons in FY19. Further, LMNR’s lemon production will expand by 1,200 acres over the next four years as newly planted trees mature. LMNR expects 300 of the 1,200 acres will become productive in FY21.

Limoneira has increased its exposure to lemons because of a long-term increase in demand for the fruit. Overall, LMNR has increased its lemon acreage from about 1,800 acres in 2010 to 3,500 acres today, with another 1,500 acres coming online in future years. LMNR has taken on the risk of heavily exposed to just one crop because it believes the lemon market has many years of growth ahead of it. According to LMNR (citing USDA stats), U.S. and global consumption of fresh lemon/lime grew 3.7% and 3.5%, respectively, per year between 2011 and 2019. The U.S. supply of lemons changes little from year to year as domestic lemon production is almost completely restricted to California and Arizona and it takes years for new trees to produce fruit. Imports, though, can affect pricing. Most (about 70%) fresh lemons in the U.S. are sold to the food service industry as most lemons are consumer out of the home. Lemon consumption has been rising as people consume more fresh food. About two-thirds of LMNR’s lemon production is consumed domestically. Internationally, consumption of lemons has risen as more people move into the middle class. Some key export markets for LMNR include Canada, South Korea, and Japan.

Lemons are much more valuable sold as fruit than for lemonade. Lemons are priced by the 40-lb. carton. The pricing of lemons is vastly different depending on how they are sold. Lemons (unlike, say, corn) cannot be stored indefinitely and must be sold to the fresh market in a matter of months. When they cannot be sold as fresh fruit, lemons are sold to lemonade producers at greatly reduced prices. In a normal market, a carton of fresh fruit sells for about $25, but a carton of lemons for lemonade sells for only about $3. Given the huge price disparity, LMNR, not surprisingly, wants to sell as many cartons of fresh lemons as possible before they must be dumped for juice. Prior to 2019, LMNR was selling 70%-80% of its lemons to the fresh market and its target is 75%. In 2019, however, the lemon market turned sour and LMNR had to sell lots of lemons at low prices.

A severe downturn in lemon pricing wreaked havoc on LMRN in FY19. As with any agricultural commodity, the price of lemons goes up and down depending on supply and demand. While demand for lemons in the U.S. is relatively stable, the supply can change quickly due to weather and production in a few key lemon-producing areas. In the winter of 2018-19, California experienced heavy rainfall. While this weather pattern ended a 7-year drought and was very good news for the state, it led to a bumper crop of large lemons and a severe downturn in prices. For much of FY19, the price per carton of large lemons was about $18, roughly 40%-50% below “normal”. The price per carton of small lemons (which is higher) also dropped. Moreover, the large crop of lemons forced LMNR to sell about 50% of its production into the very low-price lemonade market. LMNR’s overall average price per carton in FY19 was $21.46, down from $29.71 in FY18. This decline had a huge impact on LMNR’s earnings. The company’s adjusted EBITDA declined to just $1.9 mil. in FY19 from $23.4 mil. in FY18 despite a 32% increase in revenue. Moreover, its adjusted EPS dropped from $0.45 in FY18 to a loss of $0.50 in FY19. LMNR has said that every $1 decline in the price of a carton of lemons reduces its EBITDA by about $2 million. The good news, though, is that FY20 looks like a much better year. LMNR has projected the price per carton of large lemons to strengthen to $22.50, an increase of 25% from last year, but still relatively low. There could be upside to this number. Moreover, LMNR expects to return to selling about 75% of its lemons in the fresh market in FY20, which will boost its total pricing.

Avocadoes and Oranges

LMNR produces other crops besides lemons, notably avocados and oranges, which, respectively, produce about 5% and 7% of its product revenue. The company operates 900 acres of avocado production. As with lemons, LMNR views avocados as a growth market. The company (citing USDA stats) says that avocado consumption increased 103% in the U.S. between 2011 and 2018 due, in part, to the growing Latino population. Unfortunately, though, most of LMNR’s FY19 avocado crop was wiped out by a heat wave in Ventura Co. in the summer of 2018. The company’s avocado production dropped 70% in FY19 from FY18. The company collected a $2.3 mil. crop insurance payment related to the loss in FY19, but an expected bumper crop was ruined. LMNR’s avocado revenue fell to $5.4 mil. (including the insurance payment) in FY19 from a relatively low $6.6 mil. in FY18. For comparison, LMNR reported $9.5 mil. in avocado revenue in FY17, a good crop year. Avocado production in California tends to have alternating good and bad years. LMNR expects that FY20 will be a strong year, suggesting its FY20 avocado revenue will be a few million dollars higher than it was in FY19. As much of its costs (growing / harvesting) are fixed, this increase in sales has a significant impact on the bottom line.

LMNR mainly produces oranges as fruit rather than for the orange juice market. LMNR owns 1,600 acres of orange groves, mostly in Tulare Co., California. While most (95+%) of the oranges grown in Florida are used in juice, most of the oranges grown in California are sold as fruit. This is significant because, as with lemons, oranges produced for fruit rather than juice bring higher prices. Unfortunately, though, orange prices have been low due to soft demand. LMNR’s revenue from oranges dropped 32% in FY19 (to $6.0 mil. in FY19 from $8.9 mil. in FY18) despite a 27% increase in volume. LMNR’s average price per carton dropped by nearly half in FY19 (to $6.64 in FY19 from $12.48 in FY18). LMNR’s profitability would benefit if orange prices rebound because, as with avocados, most of its production expenses are fixed.

Land Value

One of the main attractions to LMNR as an investment is that the company owns land and water rights that are theoretically worth more than the current EV of about $500 million. As most people know, both water and land are scarce in California and worth more than gold / bitcoin. The problem for investors in LMNR is, obviously, that its land is covered in crops and its water is used to keep them from turning to dust. I have no view that LMNR intends to sell its properties piece by piece and distribute the proceeds to investors. The company only has one major non-agriculture project in the works (discussed in the next section). In fact, LMNR does make any great effort to illustrate the potential value of its land and water in its investor presentations. The company does mention, though, that it owns approximately 28,000 acre-feet of water rights, and that such rights in Ventura County have recently sold for as much as $20,000 per acre foot, up from $16,500 per square foot in 2015. So, in theory, LMNR’s water rights are valuable and rising in price even if not sold with property. There are possibilities for LMNR to monetize some of its rights since the company has said that it has more than enough water to fulfill its needs, even in a drought scenario, as the company has investments in several water suppliers. LMNR has also announced that it has a partnership with a hedge fund called Water Asset Management to market its water rights on the Colorado River. So, it’s possible that LMNR could sell some of its water if it needed or wanted some extra cash. As for the land, here’s the basic breakdown:

California: 8,700 acres of farmland (4,100 acres in Ventura Co., 3,900 acres in Tulare Co., and 700 acres in San Luis Obisbo Co.)

Yuma, AZ: 1,300 acres

Chile: 3,500 acres

Argentina: 1,200 acres

In its 10-K, LMNR lists the book value of its land at $94.0 million. It’s obvious that the actual value of this land is worth far more as many of the properties were acquired decades ago. For example, the book value of the 1,700 acres in Ventura County acquired by the company before 1920 is listed at $767,000, or just $451 per acre. I’m sure that was a fair price during World War I, but not today. Several other LMNR properties have stated book values below $10,000 per acre. While the prices of farmland in California vary greatly, farmland that includes water rights in Ventura Co. and Tulare Co. can sell for as much as $75,000 and $40,000 per acre, respectively. In the previous VIC report, Woolly estimated the fair market value of LMNR’s agricultural assets at $484 million (which would include the water rights). I don’t see why they wouldn’t be worth more than that today as the need for land and water in California has certainly increased in the past 6 years. The important point is that LMNR’s land and water alone is likely worth more than the current EV of about $500 million.

The Harvest at Limoneira

The Harvest at Limoneira is a housing development in Santa Paula, CA, on land that was once a lemon and avocado orchard operated by LMNR. This project generated excitement among investors when it was first proposed and the zoning was approved, but investor interest has waned as it became apparent that it was a solo project rather than a change in strategy. In fact, CEO Harold Edwards has divested most of LMNR’s non-agricultural properties over the past 15 years. Anyway, LMNR has partnered with Lewis Group to create and market The Harvest, a planned community with 1,500 residential units on 550 acres. In 2018, KB Home and Lennar were chosen as primary homebuilders. The partnership began to sell homes in FY19 and sold 210 homes in FY19 and an additional 33 homes in Q1 of FY20. LMNR has already received $20 mil. from the project and expects to receive another $80 mil. over the next few years. The Harvest is probably cash flow breakeven at present but should generate meaningful cash flow next year. My expectation is that LMNR receives the next installment of $20 mil. in cash in FY21 and $60 mil. in cash in the FY23-25 period. There is practically no incremental cost to LMNR from The Harvest. Based on these expectations, the NPV of The Harvest is about $45 million.

Other Real Estate

LMNR has a small reporting segment called “rental operations”, which generated 3% of its FY19 revenue. This business consists of about 260 rental units, most of which are rented to the company’s farmworkers. This business is not significant, but I suppose that provides some stability to the labor force.

LMNR has some other non-core real estate, some of which it has put up for sale. In September 2019, for example, it sold a convenience store / gas station complex for $4 million.

Other

LMNR owns 250,000 shares of publicly traded Calavo Growers (CVGW), which markets its avocados. LMNR once owned 1 mil. shares of CVGW but has been slowly reducing its position. This investment is worth about $20 mil. at the current price of CVGW and is marked-to-market at each quarter. Also, notably, Calavo owns about 9% of the outstanding shares of LMNR and LMNR’s CEO Harold Edwards serves on Calavo’s board.

LMNR pays a dividend of $0.30 / year, which it has consistently increased since ’13.

Earnings Estimates

Limoneira’s income statement has been affected by some one-time items, such as sales of CVGW shares and restructuring charges related to acquisitions. The low lemon/orange pricing and terrible avocado crop took a big toll in LMNR’s FY19 results. LMNR’s adjusted EPS fell to a loss of $0.45 in FY19 from gains of $0.50 and $0.42 in FY18 and FY17, respectively. Similarly, LMNR’s adjusted EBITDA dropped to just $1.9 mil. in FY19 from $23.5 mil. and $19.0 mil. in FY18 and FY17, respectively. I anticipate higher pricing in FY20 and FY21 and increasing supply. I expect LMNR’s revenue will be nearly twice as high in FY21 as it was in FY17. I forecast LMNR’s EPS to bounce back to $0.46 and $0.74 in FY20 and FY21, respectively, and its adjusted EBITDA to reach $24.3 mil. and $33.9 mil in FY20 and FY21, respectively.

Valuation

The current EV of LMNR is about $500 million. My estimate for FY21 adjusted EBITDA is $33.4 million. I get a valuation of $26.75 / share based on a 15x EV/EBITDA on FY21 EBITDA. Additionally, I assume $3.25 / share in income in FY21 from the Harvest at Limoneira and the sale of the remaining shares of CVGW, so my price target is $30.00.

LMNR typically operates with about $80-$100 mil. in debt, which appears manageable at about 3x expected FY20 EBITDA. LMNR should return to generating FCF in FY20.

Risks:

Drought, fires, climate change, water, etc. Like any other farming concern, LMNR’s business is affected by the weather. As the areas in which LMNR operates (California and Arizona) do not get nearly enough rain for its crops, LMNR is dependent on underground water. LMNR would be in trouble if it lost its water rights or the water table ran dry. LMNR, in recent years, has been adversely affected by both too little and too much rain at the wrong times. Climate change / heat is also an immediate threat. In 2018, much of LMNR’s avocado crop was wiped out by extreme heat and wildfires came close to its properties in both 2017 and 2019.

Trade. The crops that LMNR produces are imported and exported in high volumes. Pricing of LMNR’s crops is based on supply and demand. Trade restrictions that prevent LMNR’s crops from being exported would hurt its business. Moreover, in recent years, pricing for its crops has been adversely affected by excess supply being exported to the U.S. Avocado production, for example, is much larger in Mexico than in California.

Acquisitions and expansion. LMNR now has significant business operations in South America, an area in which it has limited experience. There could be unexpected problems from the integration of this business.

Land value. One of the key issues for investors is the value of LMNR’s land. A large decline in property values in California due to a major recession would likely affect the value of its stock. Moreover, LMNR now has exposure to the housing market due to The Harvest at Limoneira project. While it is widely believed that California suffers from a lack of housing supply, housing prices could fall due to rising interest rates or a recession.

Labor. How many of you want to harvest or pack lemons and avocados in 100-degree heat? Zero? This may come as a shock, but many farmworkers in California and Arizona are (gasp!) not legal residents of the United States. Don’t call ICE.

Summary: Coming off a terrible year, Limoneira appears to be a good risk/reward investment right now. Lemon pricing is improving and the comparisons with FY19 will be easy. Also, new production should add about $30 mil. in incremental revenue over the next couple of years. Yet, the stock is still about 35% below its 2018 high. I think that it will become clearer over the next few quarters that 2019 was an anomaly and that LMNR’s business is in better shape than it appears.

Catalyst

higher lemon prices, improved earnings in FY20/21, new production, acquisitions