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Landec's Got It In The Bag

Posted: Jul 07, 2008 11:36 AM by Will Ashworth

Tickers in this Article: LNDC, MON, CQB, NCX

Convenience, it's something many are willing to pay extra for, whether we're talking about home delivery of a weekly grocery order, pre-mixed cocktail drinks or ready-to-serve fresh-cut vegetables. In a time-starved world, these luxuries are the little things that make life more tolerable when everything around us is going crazy.

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Companies that make life easier deserve a little extra - a tip if you will - for saving us time and a lot of sanity. One such lifesaver is little-known Landec (Nasdaq:LNDC), maker of proprietary polymer packaging used for fresh fruits and vegetables.

What's A Polymer?
Despite sounding like a record company, and polymer is in fact a chemical compound combining many smaller identical molecules linked together into one natural or synthetic product. Plastic is one such polymer. The key to Landec's products is its Intelimer polymers, which change characteristics when heated or cooled thanks to an internal temperature switch. Synthetic polymers traditionally were developed to withstanding higher temperatures and increase mechanical properties over natural polymers.

Landec subsidiary Apio Inc. is a leader in fresh cut vegetables using its Breatheway packaging technology to extend shelf life of packaged produce. Other products exist to store fresh-cut vegetables but none can add freshness towards the end of shelf life. At least none like Landec. (To learn more, read Competitive Advantage Counts.)

The Market
Landec expects a U.S. market for precut vegetables of be in the range of $10-12 billion annually, this isn't chump change. Fresh-cut produce is one of the fastest growing areas in your local grocery store, and people are willing to pay for freshness and convenience, according to the Fresh-Cut Produce Association.

In fiscal 2007, Landec's vegetable tray line grew by 18% and so too did its 12-ounce bag line. In the first nine months of 2008, value-added sales from Apio grew 10% to $125.5 million and gross profits were up 12% to $18.6 million. During the third quarter conference call, CEO Gary Steele projected the company was on target to increase revenue 10-15% for the full year with after tax net income up 30-40%. It generated $15.1 million in operating cash flow in the first nine months of fiscal 2008 with total revenues up 14% to $181 million. Four analysts estimate revenue for fiscal 2009 at $258 million with EPS of 50 cents. At current prices, that's a forward price-to-sales ratio of 0.65. (For more on valuing a company based on its financial statements, check out Advanced Financial Statement Analysis.)

The Big Boys Are Buying
A large part of Landec's business is the Apio food division. Within this business is Apio Tech, which provides the Breatheway membrane technology. Its first big customer is Chiquita Brands (NYSE:CQB). Chiquita is using it for the Chiquita-To-Go brand that is sold to food service companies.

Landec has another deal with Seminis Vegetable Seeds, a division of Monsanto (NYSE:MON), to produce and sell unique varieties of broccoli and cauliflower using its seed technology and Landec's Breatheway packaging in both bags and trays at the retail level. Lastly, in June, Landec entered into a distribution agreement with Breakthrough Solutions, a Miami company that helps Latin American importers and exporters of fresh produce use technology to better their businesses. These are just three deals that show the company is serious about the future.

Bottom Line
Landec's stock hit a high of $16.75 last October, and it's gone downhill ever since. It's down 53% in the past year. Most people don't appreciate the special nature of the product. Breatheway is not just a bag or a tray; it's a way to serve better tasting, fresher vegetables, for an extended period. With the increase in food costs, sellers will be looking for ways to achieve a longer shelf life for perishable foods.

Landec management own 15.9% of the stock. Only one institution, Wynnefield Partners, owns more than 5% of the stock. Management clearly has the best interests of shareholders in mind. If you need further prodding, its cash at the end of the third quarter was $55.27 million, or about $2 per share. If you think the stock is worth more than $4 a share, you're looking at a screaming buy.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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