S&W Seed Is Trading At Too Good A Price To Pass Up

Dec. 07, 2021 4:32 PM ETS&W Seed Company (SANW)6 Comments
Timothy O'Rourke profile picture
Timothy O'Rourke
246 Followers

Summary

  • S&W is in the middle of a turnaround.
  • Even though the intrinsic value of the share price is slightly negative, I am rating this stock a "buy."
  • I believe Mark Wong is the right person to lead this turnaround and has been able to do so three times before.

SORGUM or Egyptian Millet

Wanda Jewell/iStock via Getty Images

By performing a calculation of book value, modeling discounted cash flows, and reviewing S&W Seed Co.'s (NASDAQ:SANW) peers, I calculate the intrinsic value of the stock to be worth -$1.84. The stock is currently trading at $2.90. While I normally would advise against buying a stock with these characteristics, I am rating this stock a buy because it has a good turnaround plan as well as the right management team to execute it.

Introduction

S&W Seed Co. was started in 1980 and has grown into a producer of Sorghum, Alfalfa, Sunflower, and Stevia seed with revenues approaching 75 million dollars for fiscal year 2021.

S&W SEED RevenuesSource: Nov 2021 S&W Seed Investor Presentation (available here)

S&W is currently in the middle of a turnaround that began with hiring current CEO Mark Wong in 2017 to lead the company away from creation and of selling GMO seed to a Non-GMO technology seed company.

Thesis

I show that the intrinsic value of S&W Seed is -$1.84 and the current selling price is $2.90. While I would normally recommend staying away from a company with a negative intrinsic valuation, I think this company and its leadership have what it takes to make this a great turnaround story and I recommend taking a small position in S&W Seed.

Detailed Analysis

Calculation of Book Value

To calculate book value, I divided the shareholder's equity listed on the 2020 Seeking Alpha S&W Seed Co financials page (available here). Specifically, I divided 74.4 million in equity by 36.8 million shares to arrive at $2.02 per share of book value.

Discounted Cash Flow Model

S&W Seed Discounted Cash Flows ModelSource: Author created model with information from the S&W Seed Page of Seeking Alpha (available here).

Inputs used:

EBITDA, effective tax rate, depreciation and amortization, net working capital, and capital expenditures were all taken from the Seeking Alpha financial pages of S&W Seed CO (link provided above).

I chose to leave the EBITDA growth rate at 0. I did this to be conservative and not paint an overly rosy picture of the company's future financial health even though I believe the company will increase sales as well as EBITDA under Mark Wong's leadership. I also estimated long-term growth rate to be 0 because the market is mature as well as very volatile. I used my normal 9% discount rate for this stock because I feel that I have priced an appropriate amount of risk in both the EBITDA growth rate as well as the long-term growth rate.

Peer Review

For S&W's peer review I compared S&W to Arcadia Biosciences (RKDA), Alico, Inc. (ALCO), Limoneira Company (LMNR), AppHarvest, Inc. (APPH), and Village Farms International, Inc. (VFF).

S&W Seed Peer Review Source: Seeking Alpha Peer Comparison tool

The peer review tool shed a little light on this company in comparison to its peers. I was able to see that the Wall Street analysts covering the company are very bullish about it as well as the rest of the sector. I find that heartening because I really like this company, but the intrinsic value is negative right now--normally a big red flag. I also like that on the Quant Factor grades given out by Seeking Alpha the valuation is currently a "B+". That also makes me think this company is in the middle of a turnaround.

I also really like that the Price to sales ratio for S&W, which is currently at 1.2.

Discussion

In the end, everything about this company comes down to two things. First, it bet on GMO seed for a long time and has now realized people do not want GMO seed. So they have gone back to the ways farmers would breed traits into seed before GMO techniques were around by cross-breeding plants to get the desired traits.

The second thing driving this company is a change in leadership. As I have already said, Mark Wong was brought in in 2017 to lead the turn around and with him he brings an impressive list of accomplishments.

Mark WongMr. Wong has successfully led several seed companies by developing seed that will sell and then driving sales to a point where the company becomes a merger and acquisition target for one of the large seed companies like Monsanto. S&W will be his fourth company that he leads through this process.

Potential Issues

The largest potential issue to my assertion that this stock is a buy is that I am mainly backing the turnaround plan and Mr. Wong's leadership. The commodities markets are historically very volatile (to the point sitcoms in the 80's and 90's would use them to create plot turns) and that volatility could have a material effect on seed sales and the stock price.

Also, there are many factors inside the company (culture for one) that can affect the turnaround. If Mr. Wong is not able to sell his vision to his team so that they can execute it, that will also have a negative effect on the company's long-term prospects for success.

Conclusion

While the intrinsic value of the stock is negative, it is trading very close to that value (at $2.90 as of the close of the market yesterday) and I would buy a small amount of it for your portfolio. I am rating this stock a buy.

This article was written by

Timothy O'Rourke profile picture
246 Followers
Hi! Thanks for checking out my bio. I am interested in the intrinsic value of stock compared to their market price. I love finding the stocks that will torpedo a portfolio before they detonate so that those positions can be liquidated before they blow up your portfolio.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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