Shares of agribusiness and real estate development company Limoneira (NASDAQ: LMNR) have lost 22% of their value over the last 12 months, and yet by some measures, the company's stock may still seem a bit dear, as it trades at a PEG ratio of 2.34. On the other hand, the lemon grower sports a one-year forward price-to-earnings (P/E) ratio of 16.4, a more reasonable market pricing that potentially indicates undervalued shares.
Is Limoneira cheap or fairly bid at the moment? Below, we'll look at the context behind the decline in the "LMNR" symbol and try to determine if shares are ripe for a current purchase.
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Recent revisions to full-year earnings estimates
Most of Limoneira's stock-price deterioration has occurred during the month of May 2019 as the company issued an interim update to full-year guidance on May 13. (It next reports earnings on June 10.) Excessive rains in California in the first two quarters of the fiscal year have created "an overabundance of large, fresh lemons," pressuring lemon pricing. The rains have pushed the domestic lemon harvest into Limoneira's fiscal third quarter, which ends on July 31.
In addition, poor weather conditions for oranges have compressed orange market pricing. Finally, Limoneira will see minimal avocado harvest revenue in 2019 due to excessive heat in the summer of 2018.
Given these multiple crop variables, the company reduced its full-year operating income target to a range of $14.75 million-$17.5 million from a previous band of $20 million-$23 million. Adjusted EBITDA is now slated to land between $23.5 million-$27.5 million from a prior expectation of $28 million-$32 million. It's worth noting that Limoneira still expects record revenue, operating income, and EBITDA in fiscal 2019 despite the adjustments.
Pricing against peers
Given that the market has now digested the revised outlook and whittled Limoneira's stock price accordingly, how is the organization valued compared to peers? The Russell 2000 Index, which is comprised of over 2,000 small capitalization stocks (and of which Limoneira is a member), currently trades at an aggregate forward P/E ratio of 22.2, according to Yardeni Research. At a one-year forward P/E of 16.2, Limoneira stands at a 27% discount to its peer group.
It's also useful to evaluate Limoneira against avocado agribusinesses Calavo Growers (NASDAQ: CVGW). Calavo markets avocados globally and provides fresh fruit and packaged-foods solutions to the grocery and foodservice industries. The two companies share many relationships: Limoneira sells its entire annual avocado supply to Calavo, while Calavo leases its corporate headquarters from Limoneira. Both companies own equity stakes in each other.
Currently, Calavo trades at a PEG ratio of 2.16, and it boasts a forward P/E of 25.69. Thus, relative to earnings growth, Limoneira is priced in line with Calavo Growers. However, it can be purchased at a discount of 37% to Calavo in the context of the next 12 months' earnings.
This discrepancy is due to the uncertainty surrounding Limoneira's 2019 lemon harvest. As I discussed above, most of the company's sell-off has taken place after its revised outlook for 2019. Shareholders will avidly wait for lemon volume and crate pricing in the organization's fiscal third-quarter report, which will be issued this fall.
Additional valuation factors to consider
Due to new accounting rules, Limoneira must mark its Calavo Growers stock to market each quarter, which has an unpredictable impact on net earnings from period to period. For example, in the fiscal first quarter of 2019, an unrealized loss on Calavo Growers stock of $3.9 million was responsible for the lion's share of Limoneira's $4.8 million net loss.
In addition, Limoneira's real estate development revenue tends to be more sporadic than its lemon and other fruit sales revenue. This year, the company has finished initial construction on its "Harvest at Limoneira" residential real estate project. Limoneira expects to recognize $2.3 million in equity earnings on this project in the second quarter, but further income is unlikely for the remainder of the year.
These types of items can cloud the immediate earnings picture. Looking further ahead, however, the company is poised for earnings growth in 2020 and beyond. Limoneira is expecting a robust avocado harvest in fiscal 2020, and more importantly, the first 300 of 1,200 acres of new lemon plantings will bear fruit the same year. The remaining 900 acres will issue their first harvests over the following three years. This is important as collectively, the new acreage will increase Limoneira's annual harvest by 30% against current-year levels and provide a significant source of top-line growth.
Ultimately, I'm not quite ready to say that Limoneira is undervalued at present. Until the 2019 lemon harvest is in and the company's earnings fall within the newly revised ranges, shareholders have reason to be cautious. However, patient investors with a three- to five-year holding period may see no reason to delay picking up shares now while they're priced more cheaply than both a related agribusiness and the company's extended small-cap peer group.
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