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Landec Down to Strong Sell

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On Jan 8, Zacks Investment Research downgraded materials sciences company Landec Corporation (LNDC - Free Report) to a Zacks Rank #5 (Strong Sell).

Why Downgraded?

Landec, on Jan 2, released its results for second-quarter fiscal 2014 (ended Nov 24, 2013). The company posted earnings of 13 cents per share, down roughly 62% from 34 cents in the corresponding year-ago period. The results were, however, in line with the Zacks Consensus Estimate.

Revenues increased 5% year over year to $120 million due to a 12% rise in the company’s Apio's value-added businesses’ revenues and a 13% increase in revenues at Lifecore. Sales, however, missed the Zacks Consensus Estimate of $124 million.

Gross profit from Apio’s value-added vegetable business was lower in the second quarter compared to the year-ago comparable period due to severe shortages of certain key commodities, mainly green beans and broccoli, as a result of weather-related availability and quality issues. These shortages resulted in higher than projected produce cost, thus reducing Apio’s value-added gross profit by $4.4 million during the quarter.

Landec faced produce sourcing challenges during the first half of fiscal 2014 due to weather-related problems along the East Coast as well as in California and Mexico, the top three vegetables growing areas in North America. Severe rain storms negatively impacted the company’s cost for green beans along the East Coast. California also has been facing a series of produce growing problems. There have been persistent periods of mixed, hot and cold temperatures in California’s Central Coast growing region that have affected farmers’ yields.

Since Jul 2013, the farmers have experienced increased pest pressures resulting in lower yields and product quality issues. Mexico had three severe tropical storms in the last six months.

Landec is focusing on managing and mitigating its sourcing risk by diversifying growing regions and modifying its contracting practices to deal with these challenges. The company’s foremost priority for the next several quarters is to stabilize its produce sourcing requirements and ensure that it can deliver reliable quantities of healthy pre-packaged produce products to retailers, club stores and food service operators.

The Zacks Consensus Estimate for fiscal 2014 for Landec decreased roughly 14.3% to 72 cents per share since the last 60 days. The Zacks Consensus Estimate for fiscal 2015 has also declined 6.7% to 98 cents per share over the same period.

Other Stocks to Consider

Other companies in the chemical-plastics industry worth considering include Westlake Chemical Corporation (WLK - Free Report) , PolyOne Corporation (POL - Free Report) and A. Schulman, Inc. (SHLM - Free Report) , each holding a Zacks Rank #2 (Buy).

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