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Value Thoughts - Landec Corporation

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April 30, 2011 – Comments (3) | RELATED TICKERS: LNDC

Landec Corporation (Nasdaq: LNDC) and its subsidiaries design, develop, manufacture and sell polymer products for food and agricultural products, medical devices and licensed partner applications that incorporate the company's patented polymer technologies.

The company has two proprietary polymer technology platforms: 1) Intelimer® polymers, and 2) hyaluronan (“HA”) biopolymers.

The company’s HA biopolymers are proprietary because they are formulated for specific customers to meet strict regulatory requirements. The company’s polymer technologies, along with its customer relationships and trade names, are the foundation, and a key differentiating advantage upon which the company has built its business.

The company sells specialty packaged fresh-cut vegetables and whole produce to retailers and club stores, primarily in the United States and Asia through its Apio, Inc. subsidiary, Hyaluronan-based biomaterials through its Lifecore Biomedical, Inc. subsidiary, and Intellicoat® coated seed products through its Landec Ag LLC subsidiary.

Basis
Financial information presented in this report for Landec Corporation, is based on the company's most recent SEC Form 10-K filing for year ending May 30, 2010, as filed with the Securities and Exchange Commission on August 12, 2010.

Short-Term Investment
The stock closed recently at $6.48, with Resistance at $7.08, a 9% increase from the recent close, First Support at $6.16, a 5% decline from the recent close and Second Support at $6.15, a 5% decline from the recent close. Should the stock price break through Second Support, the next support level is $5.30, an 18% decline from a recent close.

Long-Term (5 Year Hold) Investment
In review of the company's latest annual financial information, we note that the Current Ratio, the Quick Ratio, and the Cash Ratio, we all what we consider investment quality. In addition, Debt to EBITDA, and Debt to Equity, were with in our investment quality parameters.

What we found lacking was the company's Free Cash Flow, at ($1.15). As value investors, negative free cash flow is just a huge red flag. Accordingly we checked our FY09 valuation worksheet and found free cash flow of $0.32, meaning a year over year growth in free cash flow of (460%).

Certainly negative free cash flow growth is not always cause for alarm. But it is something the average investor should investigate prior to considering a position in this stock.

Earnings Growth
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.

However, we realize that many investors care a great deal about earnings growth and base their investment decisions on the spread between year over year earnings growth and the current PE.

In the case of Landec Corporation, the company was had year over year earnings growth of 13%, ending FY10 with earnings of $0.38 per share. With a current PE of 17, the spread between earnings growth and the PE is a bit less than 1, meaning that for a value investor considering earnings growth, a fair value for the stock is about $7.

Valuations
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $13 to $15 range. Assuming all due diligence was performed prior, we would set a Buy Target in the $8 to $9 range, a First Sell Target in the $15-$16 range, and a Close Target in the $17-$19 range.

Based on our assessment of the company's financial information we reviewed, we believe a reasonable financial risk multiplier is 48. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $4 to $5 range.

Considering a recent close of under $6.50, the potential for growth, an estimated Merger and Acquisition payback of 11.1 years (assuming EBITDA remains the same), and Free Cash Flow of $(1.15), we have no interest in adding the company to the Wax Ink Portfolio at this time.

Wax

Disclaimer
We have no position in Landec Corporation at this time, and have received no compensation to write about a specific stock, sector, or theme.

3 Comments – Post Your Own

#1) On April 30, 2011 at 6:16 PM, MegaEurope (21.46) wrote:

A quick glance at the 10Q reveals that negative FCF is not signficant in this case.  The negative FCF does not come from capex or anything related to operations, but merely the fact that Landec has been shifting excess money into short term bonds and other debt securities rather than leaving it in cash.

That said, I don't think your reasonable value estimate of $13 to $15 is reasonable, and don't think there is a significant margin of safety to buy the current price.

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#2) On May 01, 2011 at 7:44 AM, wax (97.07) wrote:

MegaEurope;

Certainly we are glad to see you disagree with our value estimate, which is why it is just that, our estimate.

Since you disagree with our estimate would you please share your value estimate?

Wax

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#3) On June 10, 2011 at 12:18 PM, holmessr (< 20) wrote:

Uh. Just a little confused. After reading the bulk of your analysis, I was surprised to see a 'reasonable value' of $13-$15 assigned. But surprised again that you have 'no interest' is a $6 stock with an RV of $13-$15. Must be a lot of stocks at 3X their RV?

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