Hanover Foods: Testing Patience

I love Nate Tobik’s blog. There is so much I have learned from him. One of the first blogs I read was on Hanover Foods, which is a small unlisted food company based in Hanover, PA. It specializes in frozen, canned, and prepared foods. The company was founded and is controlled by the Warehime family. Currently, members of the family are not on friendly terms. This has resulted in a lot of boardroom and family drama.

Anyway, a lot of this has been talked about before, and here is a link (in rough chronological order) to some (mostly Nate’s) blog posts on the company.

Sources

  1. In mid 2012, Oddball Stocks did two posts, which first brought my attention to Hanover Foods. At the time, it had an EPS of about $16, and was trading around $90, for a PE of about 5. The BVPS was around $250. The company looked cheap from both asset and earnings perspective.
  2. A year and a half later (Oct 2013), he did a review, after there were a couple of surprising (and positive) management changes. At the time, it traded around $110. The PE had increased to nearly 7, while the BVPS had risen to $285.
  3. Earlier this year (Mar 2016), he talked about the potential value in “dead money” companies, where the divergence between market and business values has increased.

Facts

  1. Management is quite bad. Surprisingly, it used to be much worse until recently. Maybe we should be happy that the first derivative is positive.
  2. The business is brutal. The return on tangible equity has always been in the 2-5% range. Last year, it was about 4.5%. The year before it was 2.8%. Returns do not exceed cost of capital.
  3. The stock is unloved. The stock price hasn’t gone anywhere in the last 10-15 years. The company is small ($65m market cap), unlisted, and is an unglamorous and tough niche.
  4. BVPS has increased steadily, even as the share price has languished. It used to be $123 in 2003, and is currently around $310,  growth of about 7% p.a.

Valuation

Since I own 100 shares, I get reports mailed to me several times over the year. I picked out numbers from the latest report (5/29/2016).

Asset Based Valuations

Here is the balance sheet information. All the numbers below are in 1000s.

Discount 2016-05-01   2015-05-01
Current Assets
Cash 100% $13,922 $19.37 $10,065 $13.97
AC Receivable 75% $29,826 $31.13 $37,091 $38.60
Inventory 50% $92,168 $64.13 $93,381 $64.79
Other Receivable 75% $1,509 $1.57 $55 $0.06
Prepaid Assets 50% $14,184 $9.87 $13,184 $9.15
Noncurrent Assets
PPE 10% $75,332 $10.48 $77,394 $10.74
DTA 50% $4,932 $3.43 $2,500 $1.73
Other Assets 50% $10,881 $7.57 $14,001 $9.71
Liabilities
Total 100% $63,325 $88.12 $73,968 $102.64
Shares Out (A + B) 718.61 720.623
Book Value $223,562 $311.10 $215,498 $299.04
Goodwill + Intangible $12,378 $17.22 $12,862 $17.85

We can come up with several numbers for the value of HNFSA.

If you discount the assets (by the amounts indicated in the first column), and take 100% of the liabilities, you end up with a “lowest” bound of $60/share. This is close to an ugly liquidation scenario.

Without discounting, if you just look at the NCAV (current assets – all liabilities) you get $123/share. In my opinion, this is a good number to anchor to. I think HNFSA is worth at least this much.

Finally, the BVPS is about $310, out of which goodwill and intangibles are $18. So the tangible book is over $290/share. But Hanover is not a great business. So I would never expect it to trade near this number. It is clearly the upper bound.

Earnings based Valuation

Sales are generally stable at around $400m. Net income is volatile. It was $9.8m in 2016, and $5.6m in 2015. Net margins are dismal. But it is quite likely that it is not managed to optimize net earnings. The EPS in 2016 was $13.73. The previous year it was less than $8.

If you slap a 8x-10x multiple on its TTM earnings, you get a range between $110-$135. That seems to be in reasonable agreement with the NCAV.

Summary

Hanover is a lousy business. In my opinion, the market thinks it is lousier than it probably is. It trades around $85-$90 these days. I think it is worth about $120-$130, nearly 30-50% higher. It pays a sub-1% dividend for you to wait and see.

It is probably a very safe investment, with limited downside. The upside is about 40%. But you may have to wait a long time.

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