Saturday, April 4, 2020

A Current AIM Small Cap Equity Holding: Landec Corporation (LNDC, $8.01): “Landec Landslides through FY2020”

Landec Corporation (LNDC, $8.01): “Landec Landslides through FY2020”
By: Katherine Nozel, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
Landec Corporation (NASDAQ: LNDC) and its subsidiaries design, manufacture, and market health and wellness products for food and biomaterials markets. The firm operates through two distinct business segments: Curation Foods (86% of FY19 revenues) and Lifecore Biomedical (14%).
• LNDC’s sources of revenue stem from markets including the United States (81% of FY19 revenues), Canada (15%), and Belgium (4%).
• LNDC explores strategic options for its Curation Foods business through Project Swift, whereby the company plans to divest several segments in an effort to expand gross margins. LNDC believes they can cut costs by $5MM from operational efficiency.  
• Revenue guidance for Q3FY20 is now $147MM-$151MM, down from its previous $154MM-$158MM projection. FY20 revenue estimate decreased from $609.9MM to $584.7MM as a result of reduced revenue from the vegetable and tray business, unanticipated legal expenses, and incremental spending related to Yucatan Squeeze innovation.
• LNDC could be heading into a new 52-week low as management decreases the estimates of income for the firm, while increasing the estimates of associated expenses.
Key points:
Although analysts are sensitive towards Landec Corporation due to recently lumpy trends, the company’s Curation Foods segment delivers a decently positive outlook. Through FY20, this segment plans to grow organic revenues by 5%, achieve gross margin of 11%-14%, and reach an EBITDA margin of 4%-6%. LNDC believes Project Swift will pave a pathway to profitability through network and operational optimization, strategic asset focus, and organizational redesign.
However, the strengths of Curation Foods will likely be offset by overall estimates for LNDC. LNDC will decrease net income by a 36% CAGR over the next five years due to a plethora of disadvantages for the firm. For example, the estimate for FY20 operating expenses has increased to $80.9MM from $75.4MM, due to greater expected costs allocated to research and development initiatives. Nevertheless, sales are forecasted to grow at a 3.2% five-year CAGR, but this slow growth in revenue will not combat increasing operating expenses.
LNDC will invest ~$13MM to maximize capacity expansion in attempt to enhance the business development pipeline. While expenses increase across both business spaces, it will be challenging for LNDC to capitalize on robust growth opportunities via additional acquisitions. However, management’s tone during a Q3 press release and earnings call suggests that the team is monitoring upcoming potential acquisition targets.
What has the stock done lately?
Due to the infectious outbreak of COVID-19, LNDC closely follows the trend of the overall market and S&P 500, with a current stock price of $8.01. LNDC is very close to hitting the low end of their 52 Week Range of $7.53 – $13.24. Due to the market’s volatility over the past month, stock performance should be closely evaluated moving forward.

1 Month Stock Price Chart
Source: FactSet
Past Year Performance:
Over the course of LNDC’s most recent fiscal year, the stock decreased 27.86% YTD, performing below the market for all four quarters. As of November FY19, net loss was incurred and EPS became negative. EPS was -$0.16 in Q3, slumping down to -$0.21 in Q4. Based on FY19’s performance, LNDC’s performance will likely continue to decline through FY20. 

1 Year Price Chart vs. Benchmark
Source: FactSet
My Takeaway
LNDC was pitched and added to the AIM Small Cap Fund in February 2017 at a price of $13.10, with a price target of $16.88. LNDC’s current price of $8.01 has dropped below the initial pitch price and certainly failed to exceed the initial analyst’s price target. Over the course of the past year, LNDC has negatively impacted the AIM Small Cap Fund and based on future projections from management and Street analysts, will continue lose value. Therefore, I believe we should sell our shares of Landec Corporation as “Landec Landslides through FY2020.”