It’s been a while, huh guys? Yeah, sorry about that. I’ve been busy with other things. My cat is pretty high maintenance.
There hasn’t been much cheap stuff available in the market of late. I did take a close look at FreightCar America (NASDAQ:RAIL) back in the early part of November when it fell to $11 per share, but the rally after Trump’s election scared me off.
And that’s about it. I’ve been looking, especially after Directcash agreed to be acquired. I just can’t find much.
So instead I thought I’d talk about a high-quality business I feel is trading at an obscenely low multiple. That business is High Liner Foods (TSX:HLF), and I think I’m going to pull a Buffett on Monday and start buying this thing to hold for a long time.
High Liner Foods is North America’s largest processor and marketer of value added seafood. Basically what they do is buy the fish, process it, turn it into fish sticks or whatnot, and sell it to grocery stores and restaurants.
It’s been a growth-by-acquisition story. Rather than listing it all, let me just post a screenshot from a recent investor presentation.
73% of revenues comes from the United States (and Mexico), with 27% coming from Canada. 80% of revenue comes from High Liner brands, while 20% comes from generic brands. And value-added products have seen a decent uptick in the last few years, which has led to higher margins. An investment in better supply chain management has also helped margins.
Recent corporate activity included the sale of its Massachusetts-based scallops plant for $15 million. It was running at 41% utilization. That leaves four plants remaining, three in the U.S. and one in Canada.
The decrease in revenue is because demand is switching away from breaded fish sticks to healthier alternatives. Production is moving in that direction, but there’s increased competition. Grocery stores can easily create their own value-added fish products, and they can sell those products fresh instead of frozen.
Weakness in the Canadian Dollar isn’t helping either. High Liner reports in USD but it collects nearly 30% of revenue in Canadian Dollars.
The good news is thanks to cost cutting and the aforementioned supply chain improvements, profits are projected to grow versus last year. Raw material costs have also gone down.
Here’s a quick look at just how much revenues/earnings have grown over the last decade, courtesy of Morningstar.
You can click to embiggen either of those if they’re not readable.
Basically, growth has been fantastic over the long-term and crappy in the short-term. Revenue has fallen over the past couple of years, but cash flow has remained pretty strong.
High Liner has lots of free cash flow because it’s still has plenty of intangibles from former acquisitions to amortize.
It’s on pace to do about US$70 million in free cash flow in 2016, versus a market cap of C$567 million. When converting to constant currency, High Liner trades at just 6.1 times free cash flow. Or if earnings are more your thing, it trades at less than 14 times earnings.
Note that capex spending will likely be low in the next few years since High Liner’s four remaining factories all have quite a bit of excess capacity.
I was going to take the time to compare it to a bunch of other North American food companies, but I won’t bother. Because it’s not even close. High Liner trades at a much cheaper valuation than just about every other company in the industry. Investors tend to like good ol’ steady food companies, especially ones that dominate their sector. For whatever reason, they don’t really like High Liner.
Debt is $270 million, versus total assets of $638 million. That is a little high for my liking.
But at least the debt is doing in the right direction. It owed $319 million a year ago, and the sale of the scallops plant should decrease the debt some more.
I think over time we’ll see High Liner slowly grow volumes, but not by much. Older people should slowly increase their fish consumption. I know we eat fish more often at my house than we used to, but we’re more inclined to buy the fresh stuff and eat it right away.
What that means is for High Liner to really grow, it needs to make acquisitions. There are targets out there; Clearwater Seafood in Canada is an obvious choice. But High Liner doesn’t really have the balance sheet strength to pull such an acquisition off. Look for it to keep paying off debt for at least another couple of years before going shopping again.
Dividend growth has been fantastic. The annual dividend was a dime per share back in 2007. It’s $0.56 today after a recent increase. It’s still got a low payout ratio, and I’d be shocked if management didn’t increase dividends annually until at least it makes another big acquisition. The current yield is 2.95%, which is decent but not outstanding.
There are a lot of food companies that aren’t growing these days. Competition is fierce and economic growth is tepid. Most of these trade hands at 20 to 25 times earnings. High Liner trades at 13 times forward earnings and 14 times trailing earnings. It’s even cheaper on a P/FCF basis.
Give it a couple of years to pay down some debt and I think it goes fishing (heh) for another acquisition somewhere, maybe in Europe or Australia/New Zealand. If it manages to do that, investors will likely revalue it much higher. It’ll be a global growth story.
Or to put it much more simply, not a lot can go wrong when you buy an industry leader in a good business at six times free cash flow.
Disclosure: No position, but will likely start buying relatively soon