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.
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.
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.
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.
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.