Limoneira (LMNR) is priced at $19 yet it was selling for nearly $25 a share in March. This Santa Paula, California-based agribusiness and real estate development enterprise has been in the news due to its disappointing lemon harvest.
Though the substandard lemon harvest is cause for concern, Limoneira’s stock was still trading in the $19-$20 range to start the year. However, Limoneira has lost nearly 40% of its value across the past 12 months. Investors are now questioning whether the stock will rebound after its harvest woes.
The Lemon Harvest Problem
The excessive rain in the southern portion of California has resulted in an abundance of large lemons, leading to reduced carton prices and a shortage of regular-sized lemons across the industry. As a result of the harvest issue, Limoneira reduced its earnings two times in the past two quarters. These revisions led up to the company’s issuance of yet another interim warning back on August 28. Limoneira management has made it clear lemon prices are still lower than expected. The typical carton of lemons sells for a mere $18 which is significantly less than regular levels. It is particularly interesting to note a carton of lemons sold for upwards of $26 at various points in 2018 and 2017.
Is There a Demand Issue?
Adding salt to Limoneira’s wound is the fact that there has been limited demand for its surprisingly large lemons. The dip in demand occurred three months ago and has not let up in the meantime. As a result of harvest issues and the drop in demand, Limoneira turned one-half of its lemons into juice in the third quarter alone. This business decision reduced revenue as well as margins. However, the company is still set to reach all-time highs in lemon production across the fiscal year. The harvest issues have forced management to publicly announce revised expectations for an annual operating loss.
There is Reason for Hope
Though this year’s lemon harvest is certainly disappointing, the silver lining is the fact that Limoneira’s stock is still trading around the same level that it was at to begin the year. Limoneira is clearly making lemonade out of its egregiously large lemons both in a literal and figurative sense. Even if the company’s financials disappoint for the remainder of the year, there is always next year to look forward to. A new harvest brings new hope and the chance to improve earnings. The company’s August update revealed fruit sizes have returned to normal, helping pricing bounce back to reasonable figures. At the moment, lemons are selling for about $21 a carton. Though this spike in lemon prices is certainly good news for Limoneira, it probably won’t be enough to alter the company’s fiscal 2019 performance.
A Question of Value
Now that Limoneira has revised its earnings, shares are currently priced around a 30 multiple of forward earnings. Translated into layman’s terms, this means Limoneira shares are trading at quite the considerable premium, especially when juxtaposed against similar small-cap businesses. As an example, the top indexes typically have forward price-to-earnings ratios around 22. Therefore, even a positive revision of Limoneira’s financial estimates won’t be enough to keep investors onboard. There is a good chance Limoneira investors will jump ship in the weeks and months ahead, sending the stock down to a lower price and subsequently, a much more reasonable price-to-earnings (PE) ratio.
Limoneira is Working Toward a Stable Future
Limoneira has an array of initiatives that will boost the company’s lemon acreage and generate revenue from different sources. The company recently invested in a joint venture for citrus production in Argentina. This business venture includes more than 1,200 acres of lemon trees. Furthermore, Limoneira is developing residential real estate to boot. Known as Harvest at Limoneira, the residential real estate wing of the company’s business commenced sales earlier this year.
Buy, Sell or Hold?
Sell or hold. There is no sense risking your hard-earned money on lemon harvests. Even though Limoneira is diversifying its business, it will take some time for its ventures outside of lemon harvests to generate meaningful income. If you own Limoneira, consider selling part of your stake while the company figures out which revenue channels will prove most important across posterity. Those who do not own Limoneira should remain on the sidelines until the company figures out how to generate reliable sources of income without a complete reliance on unpredictable lemon harvests.