My Investment in the Limoneira Company

UPDATE--Position Sold July 1--$21

I was first attracted to Limoneira because I live within 25 miles of the company's headquarters in Santa Paula, CA. I was intrigued with the company's many valuable assets, mainly its large land holdings. What is particularly interesting is that no one on Wall Street had ever heard of the company. There are no analysts following the company, and it is largely forgotten as it trades on the pink sheets. These kinds of companies are my favorite because they are completely unknown except to local investors. This creates opportunity!

About Limoneira

Limoneira engages primarily in growing citrus and avocados, picking and hauling citrus, packing lemons, and operating housing rentals and other real estate operations. The company also engages in real estate development:

Market Cap. Approx $197 million

Company Website: Limoneira.com


Investment Analysis

While growing and packaging agricultural products provide the company with the majority of its revenue, the real value in Limoneria is the company's land assets totaling 7,300 acres: 4,000 acres in Santa Paula, 500 acres in Santa Barbara, 700 acres in San Luis Obispo, and the rest in the San Joaqin Valley. Anyone who lives in Ventura County area will tell you how desirable the location is with the beach only a few minutes away and a pleasant climate.

The company's most promising assets are two properties called East Area 1 (563 acres) and East Area 2 (44 acres) located in Santa Paula. The East Area 1 property was entitled for development in 2006. This is a major accomplishment considering the strict zoning laws which normally prevent the conversion of agricultural land to better uses. The company did an excellent job of garnering local support for the initiative, and voters approved the measure by an overwhelming 80% majority. This makes Limoneira the only company currently approved for a major real estate development in the area. The development of East Area 1 is expected to be completed in a series of phases over a 20-year period.

Limoneira also owns other quality properties including a partial interest in Windfall farms, which is a 720 acre horse property  in Paso Robles. The company has invested over $25 million in capital improvements and plans to subdivide the property into 10 acre lots in 2012. While this is an excellent property, this is a slow moving project that requires time to sell. The company is also working on developing and selling a few parcels in Santa Barbara. The company was able to get the parcels entitled for development for residential and commercial units. As with Windfall farms, this will also take time because of the problems in the housing market but should move quickly when the market improves. The company has partnered with Bellagio Builders to construct two luxury spec homes in Paradise Valley, AZ. The company began this project at the top of the real estate market in 2007, is having problems selling the homes, and is currently leasing them out. Paradise Valley is an exclusive address and has held up better than other parts of Arizona in the real estate market. The company should be able to recoup its investment in time.

Limoneira also owns a few other real estate properties including workforce housing for their employees. These consist of small bungalow style units and apartment complexes.

Along with prime California real estate, Limoneira also owns significant water rights and interests in mutual water companies. The majority were acquired a long time ago and are thus valued at cost on the balance sheet ($1.2 million). But the fair market value of these water rights is much higher because it is such a precious commodity in California. From what I have been able to gather, the company has rights to approximately 15 million acre feet of water in the Santa Paula and Filmore Basins. These are important strategic assets and are worth a lot of money ($100's of millions at a minimum) to future developers or cities. The value of the company's shares in mutual water companies is uncertain, but I have read that they are worth approx. $100 million.

Management

Overall, I believe management is competent at Limoneira and is acting in shareholders' best interests. I give them credit for organizing the East Area 1 project, which took many years and required the company to work with the local community very carefully. I am also pleased that management finally decided to list on the NASDAQ even if it required them to implement the onerous Sarbanes-Oxly regulations. This move will help the company achieve a higher stock multiple compared to remaining on the pink sheets.

I have only two things against management. The first is regarding stock options. While not terrible compared to other companies, I would prefer if management used their salaries to purchase stock rather than diluting shareholders through stock options. The second reservation I have concerns a few peculiar business endeavors that the company strayed into previously including Movin' Mocha--a chain of coffee houses in Fresno, CA. Fortunately, the company has discontinued this money losing business. I hope that the company will stick to its area of expertise and focus on monetizing the company's real estate assets.

Financials

It is very easy to pass over Limoneira's balance sheet without seeing the real value of the company's assets. The company has been around since 1893, so the majority of the company's assets is valued at almost nothing on the balance sheet.

One other concern is the company's rather large amount of long-term debt at $69.2 million. This company has used debt to finance some of their real estate projects. The debt will be reduced when they sell some of their slow moving real estate. The good thing is that all of the debt is not due until 2013 and is structured at very low rates. The only thing I do not like is that all of the debt is variable rather than fixed so they are exposed to rising rates, but this is a small concern.

What I like regarding the company's financial position is that it can use the cash flow from agricultural operations to help finance its real estate projects. On average, the company will have $10-14 million in cash flow, which along with some debt, allows the company to fully fund its operations. I do not expect the company to have to raise capital through dilutive equity offerings.

Major Owners

Limoneira is a controlled company in the sense that the founders' families currently control 80% of the common stock. This certainly has its drawbacks as I have seen many family run companies systematically loot shareholders. In the case of Limoneira, I have not seen any egregious outrages which destroyed or wasted large amounts of company resources. However, there was one company action that I take issue with, and that is its "investment" in Charlie Kimball's auto racing career. Charlie Kimball is the son of the Limoneira's director Gordon Kimball who decided that the company should invest $500,000 to further his son's racing career. This smells of nepotism and misappropriation of company assets but is not large enough to merit much concern. Unfortunately, I have seen much worse in corporate America in many large companies.  As far as I can see, there are no other corrupt related party transactions at the company.

The only other major investor is Calavo Growers which owns 15% of the stock. A few years ago, the two companies agreed on a partnership which allowed Calavo to package, market, and sell Limoneira's crops. To consummate the agreement, both companies agreed to purchase stakes in each other with Limoneira purchasing 1,0000,000 shares of Calavo. So far, the investment has been sound,  and they have already realized a gain from selling 335,000 shares in 2009.

Opinion and Summary

Limoneira is a promising investment that remains under the radar of Wall Street and institutional investors. The company's excellent assets have been largely ignored and mispriced by the market. But I expect this to change as the company officially has listed on the NASDAQ stock exchange, which should bring it more exposure. It should be pointed out that this is not a get rick quick type situation but rather a long-term investment which will reward shareholders. The majority of the company's assets need to be developed over a period of years before shareholders  realize the company's full value. However, I decided to purchase shares now because I believe that now that the company lists on the NASDAQ, it will eventually get a higher valuation than it did on the pink sheets.

Full Disclosure

20% of my portfolio is invested in Limoneira (I know it is a large stake, but I am fine with that). My cost basis is around $12.40.

 Disclaimer

I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset.

My Investment in the Limoneira Company