Landec Corp: Going Bananas

Landec Corp. (Nasdaq: LNDC) wants to revolutionize the way crops are farmed and produce is purchased. Its seed coating technology enhances agricultural yields, and its food packaging extends the shelf life of vegetables. Top priority: keeping bananas in shape.

Two agricultural titans are backing Landec’s two core businesses. Its food products subsidiary Apio, Inc., which uses a special BreatheWay wrap for vegetables, has started a critical alliance with Chiquita Brands International Inc. (NYSE: CQB), the King Kong of bananas. And Landec’s technology licensing/partnering division has garnered an exclusive licensing agreement with Monsanto Company (NYSE: MON), the $38 billion agricultural goliath, for its Intellicoat seed coating technology.

Menlo Park, Calif.-based Landec, with a market cap of $355 million, owns a polymer technology that reacts to temperature. As a seed coating, the Intelimer technology allows corn to be planted three to four weeks earlier than normal; Landec’s technology also is used for soybean double cropping, which is the practice of producing two crops on the same land within the same year. The company in December 2006 sold its seed sales and marketing business to Monsanto for cash and Monsanto’s agreement to provide resources for marketing, sales and technical support of Intelimer technology, while Landec focuses on research and development.

Landec continues to seek new areas to apply its temperature-sensitive technology. It has a deal with Air Products & Chemicals Inc. (NYSE: APD), to use it in personal care items, such as creams and lotions, and in household and industrial cleaners. It also is used in adhesives.

Bin-busting yields aside, bananas are of most immediate importance to the company’s bottom line. Chiquita is selling bananas using Landec’s BreatheWay wrapping—another use of polymer technology. The BreatheWay membrane balances swings in temperatures and regulates moisture to extend shelf life and enhance the quality and appearance of vegetables and fruit.

“We want to change the way bananas are merchandised, sold, purchased, consumed,” said CEO Gary Steele on a conference call August 7. The call announced Landec’s repurchase of outstanding shares in Apio so that it is now solely owned by Landec.

Landec’s first foray with Chiquita is the label Chiquita To Go, an initiative that targets convenience stores, coffee shops and other outlets that typically get fewer deliveries than supermarkets and thus are reluctant to buy bananas, which have a notoriously short shelf-life. BreatheWay adds seven days of life to a banana—a boon for the multi-billion dollar business. So far, the Chiquita To Go plan is going well, and Chiquita is now supplying more the 10,000 outlets in North America with BreatheWay-wrapped bananas.

Chiquita’s crucial next step with Landec: it is now test marketing BreatheWay packaging at traditional grocery stores, wrapping three bananas in a bunch. Steele said Chiquita is looking at BreatheWay as a way to help transform it into a value-added company. “This is a big deal for them,” said Steele.

But it’s a much bigger deal for Landec. The company in 2008 expects revenues and gross profits to increase at Apio Tech—Apio’s division that makes BreatheWay—through higher sales of packaging technology to Chiquita. Apio Tech also is charged with finding and commercializing new applications for BreatheWay, including using it on other fruits. So if there’s a slip in Chiquita’s retail rollout, Landec will land hard.

The company is confident about the supermarket tests and on finding new uses for BreatheWay: “You should be expecting several announcements in the next two quarters on how we will be applying this technology” besides to bananas, Steele said on the conference call.

Apio also has a strong value-added vegetable business, capitalizing on the consumer trend toward fresh pre-packaged and pre-cut produce. This multi-billion dollar growth business is fueled by consumers who want convenience—a ready bag of green salad or party vegetable tray—freshness, and a perception of safety. Packaging also saves waste for the vendor. Here Landec reigns: it is the largest fresh pre-cut vegetable supplier in the U.S., mainly under the Eat Smart brand.

Landec’s revenues in fiscal 2007 ended May 27 were down 9% from the previous year to $211 million. Revenue declined because of the sale of the seed business in December to Monsanto. Apio’s value-added division grew revenues 14% to $155 million while fledgling Apio Tech’s sales grew 153% to $1.7 million, on its first commercial application with Chiquita.

Earnings per share in 2007 were $0.45, excluding the sale to Monsanto, up from $0.32 in 2006. For 2008, the average of five analyst estimates are for earnings of $0.51—a 13% increase. The company said on the conference call last month that the first two months of fiscal 2008 are on track with expectations, including backing its guidance for 10% to 15% revenue growth.

Analyst Salomon Kamalodine at B. Riley and Co. said that although the exact timing of a broader rollout of the BreatheWay technology through Chiquita is uncertain, “we believe the company has a healthy pipeline of new licensees that will drive meaningful growth beginning in FY ’09.” Kamalodine carries a “buy” rating with a $16.00 price target.

Landec’s shares reflect optimism about the company’s prospects. Landec recovered smartly from a steep selloff in early August: shares hit a low of $9.60 August 6—said to be the result of a large order to liquidate—from a mid-July high of $14.00. Shares are up 27% so far this year, closing Thursday at $13.75.

Although the stock appears fully valued at a P/E of 27 based on 2008 earnings forecasts, Landec’s cash position is a definite plus. It has a healthy cash balance of $62 million, and negligible debt. That cash was supplemented by EBITDA growth, a good sign. Steele said the company is considering lots of uses for its hoard, including research and development, capital improvements, acquisitions and stock repurchase.

As for risks, Landec says it expects increased costs for produce and labor in fiscal 2007, which puts the onus on operating efficiently to maintain margins. Market share growth in the value-added vegetable business will be difficult, too, particularly in vegetable trays, where the company already has nearly a 50% market share. And growth at Apio Tech hinges on the banana program with Chiquita. Landec notes it is dependent on Chiquita’s ability to advance foodservice and grocery store applications of BreatheWay.

So keep your eye on the banana. That’s where the story begins and ends.

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