In 4Q we benefited from increasing our position in AgroFresh following a 3Q earnings call that resulted in a 35% intraday drop in shares.
The company blamed a poor North American apple harvest (AgroFresh sells a product to farmers which keep apples ripe longer post-harvest). However, management didn’t handle the call well and failed to provide full-year EBITDA guidance despite just 45 days left in the quarter. Clearly management realized its miscalculation and 2 days later announced that they expected 2015 EBITDA of $87-$93 million, as well as a $10 million share repurchase program, followed by 6 different insider buys.
AgroFresh was a $13 stock in August and $7 prior to reporting 3Q results. Multiple insiders bought stock in the $9-$10+ range when the stock declined in late August/early September.
To be clear, the company, in its prospectus had guided to $100 million in EBITDA in 2015, up from $95 million in 2014. While we recognize a y/y decline is a reason for multiple compression, the decline struck us significantly overdone, especially since management attributed the revenue/EBITDA shortfall to an unusually weak apple harvest – the lowest globally since 2008 (corroborated by government data – see below).
Global apple production for 2015 was down more than 10% and AgroFresh’s EBITDA, at the mid-point, was down approximately 5%.
At times like this we look to one of our investing heroes, Warren Buffet. In this particular case, his words from his 2013 Berkshire letter seem particularly appropriate:
I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.
–Warren Buffett, Berkshire Hathaway letter 2013, p.17
Following AgroFresh’s healthy bounce in December, shares have declined 21% year-to-date. In late November and early December insiders were purchasing shares in the $5.50-$6.50 range, and today shares are at $5.00.
There has been no news or earnings (the company reports March 10th). There have been 2 positive sell-side initiation reports. There is potential competition, but that was true as of last summer, and our work suggests the competition will have little, if any, impact on the company’s business. AgroFresh are also 3 new business lines that they expect to contribute $90 million of incremental revenue (likely $50M of incremental EBITDA) in the next 5 years.
So, even assuming the company’s core SmartFresh product stays flat (it’s assumed to grow by $50M with new geographies and new fruits), AgroFresh would have ~$150M in EBITDA and $75-$80M in free cash flow by 2020, versus a current market cap of $225 million, and enterprise value of $650 million (if SmartFresh grows as expected those figures are closer to $180M and $105M). We’re optimistic that global apple production will revert to the norm, that management and insiders will scoop up shares personally, and via corporate buybacks, and that we could see a very substantial snap-back in shares over coming quarters. It seems that another awful harvest, competitive price degradation, and market share loss, has been more than priced in.
The above post has been excerpted from a letter of Dane Capital Management.
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