Landec Down to Strong Sell

On Nov 26, Zacks Investment Research downgraded materials sciences company Landec Corporation (LNDC) to a Zacks Rank #5 (Strong Sell).

Why Downgraded?

Landec has lowered its net income guidance for fiscal 2014 due to industry-wide severe shortages of produce that resulted in higher-than-expected raw materials cost in its value-added vegetable business.

The main reason behind the industry-wide shortage of produce is an unusual confluence of extraordinarily unfavorable weather conditions along the East Coast, California and Mexico, the top three growing areas for vegetables in North America.

Also, higher-than-expected costs are expected to lower gross margin in the value-added vegetable business in the second quarter of fiscal 2014 compared to the prior and year-ago quarters. Landec further presumes shortages and quality issues to continue into the third quarter.

Apio, Inc. the food business of Landec, has entered into annual contracts with growers for produce which depends on fixed price per delivered pound. It has also entered into contracts with its customers which depend on a fixed price per unit. Landec will buy produce on the open market at prices in excess of the contracted prices from the growers so as to meet the customers’ demand. Now, as the sales prices to the customers are fixed, the excess amount to be paid for produce above the contract at the times of shortage will unfavorably impact Landec's earnings.

Landec now estimates its consolidated net income for fiscal 2014 to be flat to up 5% compared with the original guidance for net income growth of roughly 20%, barring the $3.9 million earn out adjustment in fiscal 2013. The company expects net income for the second quarter to be 13 cents per share.

The Zacks Consensus Estimate for fiscal 2014 for Landec has gone down roughly 15% to 73 cents per share since first-quarter fiscal 2014 earnings release. The Zacks Consensus Estimate for fiscal 2015 has also declined 6.6% to 98 cents per share.

Other Stocks to Consider

Other companies in the chemical industry worth considering include Methanex (MEOH), Asahi Kasei (AHKSY) and A. Schulman, Inc. (SHLM). While both Methanex and Asahi carry a Zacks Rank #1 (Strong Buy), A. Schulman retains a Zacks Rank #2 (Buy).

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