After Its Earnings Stumble, Should You Buy Limoneira?

Santa Paula, California-based Limoneira Company's (NASDAQ: LMNR) fiscal third-quarter 2018 results included disappointing sales and an earnings guidance revision, both of which pressured its stock. Shares of the 125-year-old citrus grower and real estate development company have shed roughly 15% of their value since the trading session following its Sept. 10 earnings release. Let's review both critical numbers and details of the quarter below to see if Limoneira's recent swoon has provided a buying opportunity.

Limoneira: The raw numbers

What happened this quarter?

• Sales in the company's agribusiness segment dipped by one percentage point against the prior-year period to $38.7 million.
• Lemon sales rose to $30.7 million from $30.0 million in the third quarter of 2017, as slightly lower prices per pound were more than offset by higher volume.
• Though avocado volume increased from 5.0 million pounds to 5.3 million pounds in the third quarter, the average price per pound the company realized dropped from $1.50 to $1.06, due to an excessive heat wave that impacted the quality of the avocado crop. Thus, avocado revenue slumped by $1.8 million to $5.6 million, and this was the primary factor behind the 1% decline in agribusiness revenue over the past three months.
• In July, Limoneira completed a secondary stock issuance of 3.1 million common shares, resulting in net proceeds of $64.1 million in after-transaction expenses, which were used to pay down debt and enter into two acquisitions.
• Limoneira purchased the Fruticola San Pablo Ranch in La Serena, Chile, for $13.1 million in July. The 3,317-acre farm includes 247 lemon-producing acres, 61 orange-producing acres, and 500 acres that will potentially be used for future avocado production.
• The company also entered into an agreement to acquire one of its vendors, California-headquartered lemon packing and shipping specialist Oxnard Lemon Company, for $25.0 million.
• The company announced that it will begin receiving the first residential lot sale proceeds from its real estate joint venture, Harvest at Limoneira, in the first quarter of 2019. Management believes Limoneira will realize at least $80 million from this project over the next few years.
• Operating margin declined by 310 basis points to 29.5% against the prior-year quarter. Operating expenses climbed primarily as a result of higher lemon and avocado volumes versus the prior year. The weaker avocado pricing also hurt operating margin.
• The difference between positive net income growth and negative earnings per share (EPS) growth is due to the dilution caused by the company's July share issuance. A weighted average of 16.5 million shares was used to calculate diluted EPS for the current quarter, versus 14.0 million a year ago. Total common stock shares outstanding at the end of the current period equal 17.7 million, against 14.4 million last year.

Should you buy after the dip?

Limoneira's management decreased earnings estimates for the full fiscal year alongside earnings. The company now expects operating income for fiscal 2018 to fall between $15.1 million and $16.1 million versus a previous estimate of $15.7 million to $17.8 million. This lowers the midpoint of the initial range from $16.8 million to $15.6 million -- a 7% reduction.

Limoneira anticipates full-year adjusted earnings per share (EPS) of $0.65 to $0.70, against a prior band of $0.65 to $0.75. The amended number includes $0.06 from share dilution plus $0.02 in accretion (i.e. addition to EPS) from the San Pablo Ranch acquisition -- the Oxnard acquisition won't be accretive to earnings until 2019.

Both operating income and EPS revisions bear the impact from the weaker avocado sales. However, the bulk of this year's harvest has been sold, and this allowed management to tighten its forecast to more precise ranges.

Shareholders reacted negatively to the news of lower revenue, lower anticipated earnings, and dilution. On the positive side, the sell-off has reduced Limoneira's slightly steep forward valuation. Shares now trade at less than 32 times one-year forward price-to-earnings (PE) estimates:

Limoneira's forward PE ratio is now within range of the Russell 2000 index's average forward PE of 27.5. Limoneira is itself a member of the small capitalization index -- its current market cap stands at roughly $500 million.

These shares may hold some interest for those interested in long-term agricultural investments. Limoneira expects that its recent acquisitions will add $0.14 to $0.18 per share in adjusted earnings in fiscal 2019. Looking out further, the company's development pipeline of arable acreage is projected to increase its lemon supply by 30% over the next four years. Finally, management's appetite for new citrus acreage and other acquisitions, along with real estate development projects in process, point to the company's ability to maintain revenue and earnings growth in the coming years. For a citrus boost to your portfolio, consider adding a small position in LMNR.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.