Headquartered in Lishui, China, Farmmi, Inc. (FAMI - Get Rating) processes and sells agricultural products in China, the United States, and Japan, among other countries. The company’s expanded, state-of-the-art production and warehousing capabilities has significantly increased its customer engagement globally.

However, FAMI’s stock has suffered a 51% decline over the past month and 11.1% over the past year. Its recent, upsized  public offering of  140 million ordinary shares at $0.30 per share could be the primary reason behind the decline in stock price.

Although an increased worldwide demand for mushrooms should continue to help the company win multi-product sales orders, its weak profit margin, poor financials amid rising trade restrictions could cause the stock to see further pullbacks in the coming months.

Here is what we think could influence FAMI’s performance in the near term:

Strong Global Demand for Mushrooms

This month, FAMI’s subsidiary, Zhejiang Forest Food Co., Ltd. was awarded a multi-product export order  to Israel. The order was for the company’s Shiitake mushrooms and dried black fungus. It also recently won  a multi-product order for its superior quality dried mushrooms and dried black fungus for export to Japan. Underpinned by the continued growth in worldwide demand for mushrooms, FAMI’s high-quality mushrooms and edible fungi should see increased sales.

Diplomatic Tensions Can Affect Export

Growing geopolitical tensions have  resulted in many countries reducing their reliance on China for agricultural products. Although moves to reduce dependency on China could be a multi-year effort, a raft of trade measures restricting imports from the country could force agricultural exporters to abandon some of their biggest international markets.

As such, long-running trade disputes and diplomatic tensions could negatively impact FAMI’s export business.

Mixed Historical Growth

FAMI’s revenues and total assets have increased at CAGRs of 4.2% and 40.3%, respectively, over the past three years. However, its EBITDA and net income declined at CAGRs of 14.9% and 36.9%, respectively, over this period. The company’s EPS declined at a 46.5%  annualized rate over the past three years, while its EBIT declined at a 15.4% rate over this period.

Weak Profitability

The company’s 16.5% trailing-12-month gross profit margin is 53.8% lower than the 35.6% industry average. Also, its 7.1% EBITDA margin is 50.3% lower than the 14.4% industry average. Moreover, its trailing-12-month levered free cash flow margin is negative 18.1%. Its ROE and ROA of 3.3% and 2.2%, respectively, are significantly lower than the 11.6% and 5.3% industry averages.

POWR Ratings Reflect Uncertain Prospects

FAMI has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. FAMI has a C grade for Growth and Momentum. The company’s mixed growth history justifies the Growth grade. Also, its negative price returns over the past year is in sync with the Momentum grade.

Also, it has an F grade for Quality, which is consistent with the stock’s weak profitability.

In addition to the grades we’ve highlighted, one can check out additional FAMI ratings for Sentiment, Value and Stability here. 

FAMI is ranked #19 of 30 stocks in the C-rated Agriculture industry. Click here to view the top-rated stocks in the Agriculture industry.

Bottom Line

The increasing popularity of mushrooms in restaurants, households and wellness centers is driving the demand for FAMI’s high-quality products. However, growing trade restrictions and diplomatic tensions could put pressure on the Chinese company’s exports. Furthermore,  its weak profit margin could cause the stock to retreat  further in the near term. Thus, we think investors should wait for better entry points before investing in the stock.

FAMI shares rose $0.02 (+5.09%) in premarket trading Friday. Year-to-date, FAMI has declined -62.50%, versus a 11.44% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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