Small Cap activist Legion Partners disclosed a 5.15% stake in Landec Corp, says the $11.35 stock could be worth $20 if assets divested.

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Legion Partners disclosed a 5.15% stake in Landec Corp (LNDC) after market hours on Thursday. The hedge fund stated it believes LNDC’s stock price “does not reflect the Issuer’s intrinsic value.” Legion believes that Landec is “engaged in an odd combination of businesses that will never achieve full and fair value in the Issuer’s current structure.”

Beverly Hills-based Legion Partners Asset Management is an activist hedge fund focused on small caps. The firm reported owning just over 2% of Landec Corp shares as of Q3 2019’s close.

In the 13D reporting its stake, Legion details what it believes the value of the Landec’s various businesses are:

The Reporting Persons believe that the Curation Foods segment could be worth $304 million, based on a 5.6% EBITDA margin on $579 million in projected sales by fiscal year ending May 2022, and the Lifecore Biomedical business could be worth $447 million, based on a 26.5% EBITDA margin on $112 million in projected sales by fiscal year ending May 2022…the Reporting Persons believe that the Issuer’s intrinsic value of the Shares could be $20 per Share by May 2021, which is significantly higher than the current trading price of $11.09 per Share as of the close of business on January 15, 2020. The Reporting Persons are skeptical the Company will ever achieve fair value in its current structure and believe that Curation Foods should be optimized and then divested.

LNDC was up 2.25% at $11.37 in mid-day trading Friday.

Legion Partners disclosed a 5.15% stake in Landec Corp. The hedge fund believes LNDC’s Curation Foods division “should be optimized and then divested.”

On Dec. 27, Landec’s CFO resigned for “personal reasons.” On Jan. 2, LNDC reported a fiscal second-quarter loss of $6.7 million vs a profit in the same period last year. The loss, adjusted for restructung costs, was $0.16 per share, worse than analyst expectations. CEO Albert Bolles had this to say in the subsequent conference call:

For the second quarter of fiscal ’20, consolidated revenues increased 14% to $142 million compared to the second quarter of last year. However, we experienced a greater-than-planned net loss and a decrease in gross profit and EBITDA during the second quarter of fiscal ’20…We have an extensive operating plan that we’ve launched to improve performance at Curation Foods.  

Legion Partners disclosed a 5.15% stake in Landec Corp. after buying LNDC aggressively in the wake of disappointing earnings.

After the earnings report on Jan 2., LNDC stock was under pressure after hours, trading down 15%. But Legion, which already owned about 2% of Landec’s shares, was ready to pounce. The 13D shows that the hedge fund bought 16,198 shares at $9.60 in the after market after the earnings report. The next morning Legion continued its buying, taking down 227,000 shares at prices ranging from $9.81 to $9.95. The fund continued buying through Jan. 8 (when it crossed the 5% ownership threshold), accumulating 381,544 shares at an average cost of 10.07 on Nov. 21 through Jan 8. You can see all of Legion’s buying in Schedule A of the 13D.

Landec Corp (LNDC) six month daily chart. Source: Interactive Brokers

Legion Partners was co-founded by Ted White and Christopher Kiper in 2012. According to the firm’s ADV part II:

Legion Partners uses deep fundamental analysis to identify companies it believes may be significantly undervalued relative to intrinsic value and future opportunity.

Legion Partners engages a company by focusing the attention of its shareholders,
management, and board of directors on factors that Legion Partners believes are
contributing to the company’s underperformance. LegionPartners periodically meets
with members of the board of directors and/or management as well as representatives of portfolio companies. The intended result of this engagement is to increase the company’s stock price to align with LegionPartners’ view of its true long-term value.

After the recent buying, Landec is Legion Partners’ #8 position.

Legion has $407 million in managed 13F securities. The firm surpassed $100 million in 13F AUM in Q2 2017. Since then, the fund has returned 60.58% vs the S&P 500’s total return of 41.16% over the same period. That’s based on an equal-weight portfolio of Legion’s top ten holdings, rebalanced quarterly as 13Fs are filed.

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