Lifecore Stock: Potential for Rapid Earnings Growth and FCF Surging (NASDAQ:LFCR)

The following part is excerpted from: This funding letter.

Lifecore Biomedical (NASDAQ:LFCR)

Our laggard, Lifecore, slipped ~350bps on its performance this quarter.

In our fiscal year 2023 letter, we noted our less-than-ideal experience with merger arbitrage strategies: Life Core Biomedical Science It is the only remaining investment of this nature in the portfolio. We had hoped for a positive outcome for this particular investment, but that proved to be too optimistic when Lifecore’s board decided to end the strategic process without a deal. Lifecore also took a 3% position in the portfolio, and its shares fell from $7.50 per share to $4.50 per share following this announcement. However, unlike other merger arbitrage positions, we have decided that we are willing to own the stock if the deal does not go through. More shares were purchased at $4.80 per share to get Lifecore back to the 3% position. The average cost was $5.3 and the stock closed at $5.8. At the end of the quarter.

Lifecore Biomedical is a contract development and manufacturing organization (“CDMO”) with expertise in specialty formulation, aseptic filling and final packaging of complex injectable medical pharmaceutical products. From our previous experience investing in similar businesses, we have found these assets to be very difficult to operate, and this is largely due to a single factor: compliance. The FDA grants approval and conducts periodic inspections of facilities to ensure compliance with regulatory standards. When a drug product is developed and manufactured by a CDMO, the FDA has responsibility for both the CDMO and the sponsor (the company that owns the drug) to ensure that the product meets regulatory requirements for safety, efficacy, and quality.

“You’re looking for a gamble that’s wrongly priced. That’s investing. And you have to know enough to know if that gamble is wrongly priced. That’s value investing.” -Charlie Munger

Lifecore will increase production capacity from 22 million units to 70 million units over the next four years. Although not all capacity can be filled at the same price, this means Lifecore’s revenue could increase two to three times over the next four to five years. When combined with operating leverage, this means rapid growth in revenue, perhaps closer to 3x. Importantly, most of this capacity has already been paid for, so free cash flow is likely to surge.

As I’ve mentioned before, our philosophy on portfolio construction is that we want to be focused enough to matter, but diversified enough to survive. The plunge in Lifecore’s stock price did not have a significant impact on its overall performance. We manage risk at the business level. and At the portfolio level utilizing appropriate position sizes. In fact, these declines help you add capital to attractive opportunities. Despite general markets hitting record highs, we remain bullish on the White Falcon portfolio due to businesses in the portfolio such as Lifecore being acquired at very attractive IRRs.