I’m apparently not even trying with the titles anymore. “Here is a title that describes the thing I’m talking about. And you’ll like it.”
Village Farms International is a greenhouse grower of tomatoes, cucumbers, and bell peppers. It owns approximately 110 acres of greenhouses in B.C., as well as 130 acres worth in Texas. It also has distribution partnerships with a few other growers. It sells fresh vegetables to many of North America’s largest food retailers, including Wal-Mart, Costco, Loblaw, and so on.
Greenhouse farming is more effective than traditional farming for a few reasons. The company can stagger the beginning of crops so that it can produce all year round. Yields are more in the summer because of the amount of sunlight, but year round production is still important. Greenhouse vegetables also tend to command a higher price, because plants grown in a controlled environment end up in better shape than the comparables. Greenhouses can protect from pests, hail, and so on. And the greenhouse process uses significantly less water than traditional farming.
In 2012, a gigantic hailstorm destroyed the company’s greenhouses in Texas. It has since rebuilt using $47 million in insurance proceeds. Here’s why this is important.
- The total value of the company’s real estate, according to the most recent balance sheet: $99 million
- Cost to rebuild 80 acres, which is 33% of total growing area: $47 million
- Putting the same valuation on the other 66% of growing area would value them at $94 million
- Total value of greenhouses: $141 million
Based on just the value of the greenhouses alone and not even the land underneath them, it looks like the value of the real estate is understated by at least $42 million. That doesn’t include 4 distribution centers (located in B.C., Washington state, Texas, and New York), nor the 2 corporate offices.
Thanks to operations from Texas coming back online, revenue jumped to $41.3 million in the second quarter. Gross profit was just $4.47 million, mostly due to weaker tomato prices, which declined 10% year-over-year. The company lost $0.01 per share in the quarter.
One of the issues that has plagued Village Farms International over the years is Mexican farmers dumping cheap tomatoes into the U.S. market. It drives the price down and is generally bad news for everyone involved. So it, along with some competitors, took their beef to the U.S. government, who got the Mexicans to agree to a number of concessions. Mexican farmers have to sell to registered middlemen, they are severely limited to the amount they can export if the price falls below a certain floor, and they have to certify that greenhouse tomatoes are just that. Over the long-term this is good news, but as we know the government can change its mind on stuff like this.
Essentially, it looks to be a break even company when tomato prices are weak, and should be solidly profitable when prices recover. If prices during the last quarter would have stayed steady compared to last year, the company would have earned $0.03-$0.04 per share. That’s not terrible considering the share price is currently at $1.12.
The biggest concern is the company’s debt of $57 million, compared to total equity of a little over $60 million. It just refinanced the debt in 2013, with an amortization of 14 years and a term of 5. Steady progress has been made, but it’s still a pretty big pile of debt. Cash currently sits at about $6 million. It’s proven over the last few quarters that it can continue to earn enough to cover the mortgage payment, but that’s still a risk.
And in an odd move, the company acquired a power plant for $5.2 million. I assume this is so it isn’t stuck paying B.C. Hydro a bunch of money for power each month, but it was billed “as focus on improving the sustainability profile of Village Farms’ greenhouse operations in Delta, B.C.” It does have an agreement with B.C. Hydro to supply it with energy, but details besides that are pretty slim. The company took out debt of $3 million to finance it.
I’d like to see it pay down the debt, not increase it.
The bull argument
Essentially, buying Village Farms International comes down to the following arguments.
1. The company has a proprietary growing system that it calls GATES. The system allows it to be more productive and get greater yields than its competitors. The possibility exists to license GATES, but that looks to be unlikely.
2. Now that operations are back up to full speed, an increase in tomato prices would pretty much go straight to the bottom line. As previously mentioned, tomato prices have been weak.
3. A noted value investor was just added to the board.
4. The CEO owns approximately 25% of the shares outstanding. One of the co-founders also has a big position, but he has indicated that he will start to sell some of it soon.
5. Not only are there large barriers to entry (meaning, some hick farmer can’t just up and start a tomato greenhouse of any scale), but the value of the greenhouses is understated on the balance sheet.
6. As the balance sheet currently stands, shares have a book value of $1.56. At Friday’s closing price of $1.12, that’s a discount of 39.2% to book. The company’s intangible assets are negligible.
Based on the company as it is, I think the potential exists for it to earn $0.15 to $0.20 per share on an annual basis. If that happens, I’d put shares somewhere in the range of $1.75 to $2.00 each, which is approximately a 40% return from today’s levels. I’m publishing this on Wednesday because I’m going to try and see if I can pick up a few shares between now and then. I’m concerned about the debt levels, but even during bad times the company has faithfully paid. There will always be demand for tomatoes, and it’s obvious that greenhouse tomatoes are better. I think Village Farms International is a buy here.