Innovative Foods (IVFH) is a storied company, with a complicated past. Between this, and the effects of COVID-19, the company's share price has been absolutely destroyed- lingering around .55 cents at the end of 2019, in the mid to high .40s just before COVID, going as low as the TEENS, but generally trading in the high .20s and low .30s for the spring and early summer. Even with some price recovery, the current price is down ~40% from it's pre-COVID levels. I believe that this is unwarranted. Strictly on a valuation level, it appears almost assured that the business will survive this pandemic, and, somewhat counter intuitively, has a line of its business GROWING. For other items affecting the valuation, people anchor to their past perceptions of a company, and that gets a stigma working against a stock for a long time. This seems to be the case for IVFH. Let's investigate why I do not believe that the stigma is relevant, and that the company is set up for great success in the future.
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For the TL;DR crowd: This is a well established company with a multiline (and further diversifying) revenue base, conservative debt, and ample cash, and a GREAT workforce. The quality of the workforce is manifested in the volume of transactions AND the positive reviews from customers on their online sales channels. It is presently trading for around my estimation of liquidation value. This liquidation value is easily WAY LOWER than the current replacement cost of the company. You also get 2 neat business lines totaling nearly $58mm in revenue thrown on top of that, for free. Before COVID, one of these was growing handsomely (specialty food services grew ~9%), and the other, more rapidly (ecommerce grew ~16%). Since Covid, the former got hurt, but will come back with restaurants opening again, and the other has recently experienced TRIPLE DIGIT revenue growth. I'm talking triple digit percent growth too... not hundreds of dollars.
Given the company price, in relation to book value, it would be impossible for you to simply "start up" this company for what you can buy it for in the marketplace. It would take YEARS to build the infrastructure, inventory, customer relationships, employee base, and US Food Contract. You get all of the infrastructure, experience, and the like, for free at the present price of the common stock.
Based on the current market price, and sentiment, people just seem to be angry that the company didn't do as well as they thought it should have in the past. A disappointed and apathetic shareholder base has led to a price decline. A common criticism of investors was that the ecommerce acquisitions (mouth.com, igourment) were an imprudent use of shareholder capital. Management has worked steadily on these ecommerce platforms and now the Covid crisis has shown the value of these sites AND their future potential. If you look at the actual results of the company, you'll see this stock should have performed quite well. It is not the stock, or the company's fault that investors had too many expectations for it. Management can't control expectations of the shareholder base, only how they execute their business plan. I believe they have been doing a great job.
I currently see no reason why this company should not currently trade for it's pre-covid levels of more than .50 cents a share. Further, once their ecommerce operations fully execute on their true potential, this very well could trade for even more than a dollar a share. Due to the diversification of the business, from the acquisitions of Mouth.com and iGourmet, the company will be able to survive COVID, and be positioned to grow a ton. Other companies in this industry have been sold for more than .55x revenue, which would imply in excess of 2.7x upside for the stock- implying it could trade for more than $.80/share. With some growth, this could well be more.
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Balance Sheet: Hidden Assets, Amortizing Items, and Cash.
When reviewing the company's balance sheet, there are a lot of goodies to look at... AND some HIDDEN GEMS!
$9.9mm in current assets, consisting of $3.96mm in cash, $3.3mm in A/R (some of this may be written off from the restaurant businesses they deal with, but, I am not TOO worried about anything material), and $2.35mm in inventory (more on this, later). There is more though, that is not carried here. The company got a PPP loan, to the tune of $1.65mm, for a legit need- while they are public, they don't really have the ability to just go out and raise capital by selling shares like a BIG company. Additionally, their revenue from restaurants fell off a cliff, and they have certainly experienced uncertainty and risk. This is the type of company that these loans were made for. It is a small business, employing dozens of people in different locations, including most notably, rural PA. Additionally, this will help them offset any lost A/R from restaurants that they sell to in larger cities (ie NYC). With the company's share price going as low as .15 cents, the market was clearly worried about the future of the company, further justification for them getting the loan. It is my understanding that they had legal council look at this too, and have confidence that the loan will be forgiven. This brings the company's current assets to $11.55mm.
Going on to the other assets on the balance sheet, you will see $6.65mm in PP&E. I believe that this consists of 4 primary REAL assets:
3) The company's NEW 200,000 sq ft warehouse at 220 Oak Hill Rd, Mountain Top, PA. This sits on 15 acres of land. The company made a substantial down payment on this piece of property, and has yet to move into it. Here is the tax parcel info. Total purchase price was $4.5mm, but, it appraised for $6.15mm, as is, and $8.0mm with the improvements that the company plans to do. the total loan against the property will be for ~$5.5mm when the construction is completed. The company hopes to move into this facility before the end of the year. In the meantime, it is generating income through logistics services, and through a cell phone tower lease! Pennsylvania stopped most all construction projects because of COVID, but, things have resumed as of May 1st. (HINT: THIS IS THE TYPE OF ASSET CLASS THAT IS GAINING IN POPULARITY, as the Wall St Journal suggests that warehouse demand will pick up both from Covid and from a shifting economy)
4) Leasehold improvements at the company's CURRENT warehouse at 508 Delaware Ave in Pittston, PA. The company will be moving from this facility, into the new 200K ft warehouse, that is located ~30 minutes away. IVFH purposely bought a facility in this area, so that they could maintain their workforce. Both an ethical and an economic move on their part! More on this later.
When looking at the earnings statement, you can see that a lot of the PP&E has been depreciated. In fact, there is just under $1.5mm in depreciation. Let's say that this just goes against the NON-Building items (vehicles, furniture, and equipment). That means that there is $6.2mm of real estate on the books, and then ALL OF THE OTHER ITEMS, are effectively being carried at just a hair more than $400K. Given that the company's real estate has gone UP in value, I think that the PP&E estimate is probably pretty accurate, at the net amount of $6.645mm, if not a bit understated.
Now, the depreciation against property isn't all that is obfuscating the true earnings power of the company. Last year, IVFH had OVER $1.4mm in depreciation and amortization. This is largely coming through the amortization of intangibles, from acquisitions that have been made. These earnings charges are going against the income that the purchased entities have produced. Generally you would anticipate for there to be revenue declines or something that would "justify" the economic reasons for this depreciation... Well, revenues from ecommerce and such, have been going UP... so, this "charge" probably doesn't reflect the true earnings power of the purchased entities. At the time of this writing, these charges from last year represent ~12.1% of the company's market cap ($11.56mm)... as you can see from the screenshot below, these charges are going to be running out in the near future, and will in essence go straight to the bottom line. So, the P/E ratio you see on Yahoo Finance of ~46 will become a smaller number. Earnings numbers should start to converge somewhat, to their EBITDA numbers, as you can see in the screenshot below. In 2020, they will be about 1/2 what they were in 2019; in 2021, they will be cut in half again; in 2022, they will again be cut in half, until almost totally disappearing in 2023.
Continuing along with the analysis, there are some other items, like intangibles, some lease assets, and goodwill, but, these go with the earnings power of the business, so, for the sake of argument, let's say that they are worth their stated amount.
Total assets = $20.87mm + $1.65mm of PPP Loan = $22.52mm
Now, onto the liabilities of the company. All are pretty standard things: leases, interest, deferred revenue, accounts payable, and the like. Carried at $9.86mm
Net Book Value: $12.66mm | price to book value: .91
Let's say that you want to take out the intangibles, of $3.5mm. Ok, we can do that, but, if we impair them, let's add in a bit of money for taxes. Since the company pays taxes at a rate of 27.6%, I'll value these $3.5mm of assets at $966K.
This brings us to an effective tangible book value of $10.13mm. This is 87.6% of the company's market cap of $11.56mm, makings its price to book value 1.14
I think that the best way to think of this, is that at the current price of the stock, it is essentially trading for an "orderly" liquidation value, and then you get this neat business thrown on top, for free. PLUS you get any growth, and coming operational efficiencies for FREE. And this is nothing to snub your nose at. Last year, the company was doing a whopping $57.9mm of revenue (which grew 9.45% year over year).
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But WAIT, THERE'S MORE!
*The company has a net operating loss of $682K. While not huge in and of itself, it is not insignificant, and these things do add up. It seems that the company will (unlike most others) actually utilize this asset.
***Ownership: Insiders own a fair bit of the company as you can see from the chart below. A few items need to be pointed out:
Denver Smith recently purchased shares, now owning 2.7mm shares, totaling 7.9% of the company. JCP has bought more, and now owns 4.35mm shares, for 12.7% of the company. This is probably the most interesting development. JCP is run by James Pappas, in Texas. He pushed for the sale of Corner Store (CST BRANDS) to Circle K in 2016. He was also on the board of Jamba Juice, which was bought out for $13.00/share. While buying more shares and having an interesting history with other companies, Pappas now has a board seat, with another appointee. I think that this is a very interesting development, as it seems to be his view that a company should grow until it can't, and then be sold. This is a welcomed development not just for this, but also because the company voted in a non-binding resolution, or an advisory vote, to have independent directors approve any SIGNIFICANT transaction- see below, from the most recent proxy:
THE FOLLOWING TRANSACTIONS SHALL REQUIRE THE APPROVAL OF A DESIGNATED BOARD COMMITTEE COMPRISED OF INDEPENDENT DIRECTORS: (I) AN ACQUISITION IN WHICH 20% OR MORE OF THE COMPANY’S OUTSTANDING COMMON STOCK, OR 5% WITH RESPECT TO A RELATED PARTY TRANSACTION, ARE PROPOSED TO BE ISSUED, (II) ISSUANCES OF COMPANY COMMON STOCK WHICH WILL RESULT IN A CHANGE OF CONTROL OF THE COMPANY, AND (III) A PRIVATE PLACEMENT INVOLVING COMMON STOCK EQUAL TO OR GREATER THAN 20% OF THE PRE-ISSUANCE OUTSTANDING COMMON STOCK AT A PRICE LESS THAN THE GREATER OF BOOK VALUE OR MARKET VALUE.
I think that this puts shareholders in a very unique position where they can feel comfortable that management is hearing them- and, it gives Pappas a fair bit of sway in the boardroom. At current prices, unless management thumbs its nose at shareholders, a large dilutive acquisition with stock, is unlikely unless there is board consensus believing that it will create value for shareholders.
Presently, I think that IVFH has a lot of room to grow, as recent rates of growth indicate. Additionally, as the retail environment continues to shift from in person, to online, IVFH will be a beneficiary of that shift. The composition of the Board hints this company is destined for revival!
**SG&A Costs Have Been Higher As Of Late-
This is because of them hiring for growth, and for more back end support. I think that if this was a company with the attention of Blue Apron, Amazon, Chewy, or any other ecommerce company, they would have a sky high valuation, because of investments like these. As a side note, APRN is currently using ~660K of warehouse space to produce $454mm in revenue or ~$687/sq ft, whereas IVFH uses ~105K sq ft (this doesn't include the new facility that is nearly 3x the size of their current leased warehouse) to produce $58mm in revenue, for ~$552/sq ft. Chewy is very close as well, with nearly 6.3mm sq ft of space producing 4.85bb in sales for a total of $758$/sf ft. IVFH is very close to being as efficient as APRN and CHEW are with their use of space. Based on my conversations with management, the company will be getting more efficient with the utilization of their space, from the coming move to the new warehouse. If IVFH is more efficient with their current choppy setup of the leased warehouse- just how much more efficient can they become? I am betting quite a bit, as I will note later.
***New Location Efficiencies
As noted earlier, the new location kept substantially all the workers of the company employed. This is FANTASTIC from an operational perspective. It explains why they have been able to scale up their ecommerce business with the onset of Covid. I showed a map, showing that the locations are about 1/2 an hour apart. BUT CHECK THIS OUT...
While the company's primary facilities are within 50 miles of a little more than 1/2% of the nation's population, it is within 125 miles of New York City, and Philly... which makes it 175 miles of 14.2% of the population... this is part of what makes the area very attractive to the company as it continues to scale- it is close to numerous population bases, had access to cheap real estate, was able to keep its workforce while moving its facilities, AND should see the asset price of its warehouse go up as warehouse space becomes more in demand.
Additionally, the new 200K ft. space is laid out a lot better than their current facility. The old location was choppy, and hard to use different parts of. They will have a much larger slicing room for charcuterie, cheeses, and the like. The company will be better able to use this to continue launching house brands of foods. Increasing house brands will help them scale up and provide more of a competitive edge. You will notice that the company also acquired a cell phone tower lease, with the purchase of the property. This lease should be in the range of $20K a year, and will provide stable, near 100% margin revenue! There are some other great aspects of this building, but, that is for discussion at a later date.
If you look at the unemployment rates in the area, it seems that it would also be easy for the company to have better chances for hiring workers, or, even getting better deals on wages. This could be a great way to reduce expenses, while also expanding capacity.
*New Products & A New Website...
The company has been experimenting with new products. Recently, the company introduced frozen prepared meals, on the iGourmet website. When asking about this, management told me that they would "NEVER" have a kitchen on site again or anything of that nature. The production of these meals is outsourced to other firms, thus the inventory risk is minimal, and margins are in line with their ordinary expectations. The company is looking at other offerings in this realm, along the lines of Gold Belly, where they can use their extensive back end facilities, to help link restaurants directly to consumers. This is a pretty interesting business, that has a HUGE opportunity to grow in the coming years. One thing that I found interesting was this 10 pound crawfish kit. It comes already seasoned and such, so, all you have to do is reheat the 10 pounds of crawfish! At $89 dollars, for 10 pounds of food that you can't screw up, that seems like a deal compared to $75.90 from Louisiana Crawfish Co, for UN cooked and UN seasoned food. Interestingly, it seems like IVFH has partnered with Louisiana Crawfish Co, to sell these items.
This entry into the frozen prepared food business is NOT to be confused with the company re-entering the prepared food business, where they take on the duties of actually making the food... The company's acquisition of Fresh Diet is now referred to by management as "the acquisition that shall not be named". I am have confidence that another acquisition of this nature will NOT be happening in the future.
People are allowed to make mistakes, especially if they learn from them. I believe that to be the case here.
The new website should be up in a few months, and will be MUCH better than the present one. Similar in nature to the hip and sleek mouth.com site.
** Uptick In Online Sales:
The company smartly expanded from US Foods to a Direct To Consumer Model, and has grown that business from $0 to what I expect to be GREATLY in excess of $10mm this year (maybe $20mm+?!), and done so in a little more than 2 years! A great aspect of this business shift, is that the company's accounts receivable risk becomes virtually nonexistent, since customers pay BEFORE delivery! Regardless, because of managements shrewd acquisitions, they were uniquely ready for COVID, and are already showing the benefits of a diversifying revenue base.
Their feedback has ramped up in a huge way. I am guessing that they have a feedback rate of ~20%.. So, in the past month, they probably had 4,000 transactions on ebay, alone. Of those, only 2 people were "meh" enough to leave neutral feedback, and only 1 person was so incensed that they left a negative feedback. The rates of neutral and negative feedback seem similar for other time periods, as well. That strikes me as pretty amazing and evidence of good operational systems and workers.
Furthermore, let's say that they did get 4,000 transactions in the past month, based on the feedback rate I mentioned. and, let's also assume that the average transaction is $30... which, I think is low, because someone can spend that much on a few pounds of beans (and they have sold 117 of them!) from IVFH. That equates to revenue of $120K/month! Or, $1.4mm per year... and that is JUST ON EBAY. When I received my package from their ebay store, they had included a discount card, that was driving me to their website, where I would assume their margins would be higher, but with the same price per product for the customer. If they can migrate customers from various websites such as amazon or ebay to their website- all the better. Here is a chart that I made, of data collected from 4/19/2020 - 5/20/2020 to track their Ebay sales. This shows that even AFTER the end of April, they were STILL seeing large surges in ecommerce!
Now, this growth has subsided some, but it is still UP HUGELY. on 6/22/2020, they had 736 positive feedback left in the prior 30 days! That's pretty amazing- especially if they have been efficiently migrating customers from ebay to their own websites.
I was curious to test this experience, that the company provided, with their online sales. Anytime that you increase a revenue line by HUNDREDS of percent in a short period of time, systems break. So, I ordered product from both their Ebay store, and their website, and received both orders super quickly. Everything was done correctly! THAT is a FEAT when experiencing huge revenue growth. Few companies can do that. Everything showed up in a matter of days (36 hours in one case), was packed well, and the like. In fact, I liked the experience so much, that I have started to buy the company's gift baskets for gifts (Mother's Day) and for gifts to sellers for real estate closings, when buying properties.
**Expanded the board- was formerly 4 members, 2 of which were independent. Now, it is comprised of 7 members. They also have all the necessary committees to have good governance- Compensation, Audit, and a Nominating and Corporate Governance committee. These things may seem minor, but, they are actually a big deal.
On the note of directors, Mr Wiernasz, who is also the Director of Strategic Acquisitions, was with US Foods for 13 years. He is very familiar with Innovative's primary customer, which is a HUGE plus, and a mitigating factor to the risk of losing them as a main customer- in 2018, the companies amended their contract so that it automatically renews. That is always a good sign. This said, it appears that US Food accounted for ~72.8% of the company's Specialty Food Service revenues and a total of ~56.9% of the total revenue of the Innovative in 2019. In 2018, US Food made up ~73.2% of Specialty Food Service revenue, and ~57.4% of total revenue. So, the company is taking steps to mitigate this risk- Granted not HUGE steps in the past year or so, but they are there- in 2017, US Foods accounted for an astounding 75% of TOTAL revenue of the company... so, you can see that they do take this seriously- the well timed acquisitions on iGourmet and Mouth.com played a huge roll in this, as the company greatly diversified its revenue streams. Again, while main customer risk is there, the company has been (smartly) taking active steps to remedy this issue.
Again, if we go with the assumption that e-commerce growth subsides from the 400% growth, to say, 100% for the year, that would make e-commerce revenue double to $21.4mm, which I think is very conservative. At that point, US Foods, with say, a 20% decline in revenue for the year (here is an article predicting a 25% decline, but I am guessing that the growth rate that IVFH has had, will help mitigate the overall decline of specialty food sales) would still make up just under 60% of revenues for the company. Under these assumptions, revenue for the entire year, would STILL BE UP, net, for the company. This said, New York City, which has seen the most draconian of US shutdowns, has seen the greatest decline in restaurant bookings; so, this is a little bit of a wild card. However, there are many points that mitigate, and outweigh this risk. I generally think that the workforce of IVFH is relatively nimble in the ability to reduce or increase hours as needed.
It could be postulated that the company can be "amazoned." However, the niche market that the company works in, should prove to be resistant to this. Also, the amount of infrastructure that the company has invested in would be difficult to replicate quickly, efficiently, and in a manner that would disrupt their current and future relationships. So, while not non existent, I don't view this as a huge threat.
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Other Catalysts:
*Uplist
The company has talked about this, and while it has yet to achieve this mark, it has made the right steps- such as adding independent board members, and the like. They also have an approved reverse split that has yet to take effect. If they uplist, you could expect an increase in the share price, which would be great for the company in the sense that it would be able to use more valuable stock in bolt-on acquisitions. This would be kind of a dream for this company, since they seem to have their back end operations set up to easily scale up, and do so with higher incremental margins.
***Show the true profitability of iGourmet, and other online systems.
A lot of times, you have to get scale before you can show real profitability. If you look at the purchase agreement between the company and the state of iGourmet, they were in essence incentivized to sandbag results. Whether or not they did, I don't know. But, I do know that IVFH has been investing in itself - via hiring people and the like. These expenses, much like low prices at amazon, don't show up as the Cap Ex that they really are- they show up as increasing SG&A and decreasing margins- hence, LOWER EBITDA. Even with these expenses, EBITDA has not disappointed, with the company posting $2mm of cash EBITDA for the year of 2019... I am betting that this will be significantly higher in the coming years, as COVID subsides, the company grows, and its investments start to pay off.
***** Normalization of EBIDTA/Earnings.
The company noted in it's most recent release, about all the info that you need to figure out the profitability that it should have, should things normalize. In 2019, as noted earlier, the company generated $2mm of CASH EBITDA. Had SG&A only increased by the same percentage as revenue from 2018 - 2019, that would add $1.35mm to EBITDA, that would flow to the bottom line. I am using this hypothesis, because I generally think that the hiring and investments that the company made for future capacity, are showing up as SG&A, and thus, being expensed, rather than capitalized. All of a sudden, CASH EBITDA goes from $2mm this year, and $3.1mm last year, to $3.35mm for the year of 2019! Most all of the company's EBITDA is actually earnings, as the depreciation and amortization is not really economic. Let's be conservative, and say that normalized earnings (with adjustments) is $2mm... with a market cap of ~$11mm, the company is just 6, rather than the 55x that is presently showing from income of $.2mm in 2019.
The company adjusted income in it's most recent press release, to $1.5mm- with my adjustment of just a paltry $500K, it seems pretty conservative, especially for a company with the revenue growth, and the earnings growth that the company should expect with normalization of it's business, as well as when accounting items quit needing adjustment.
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Conclusion:
What's this worth? Well, for a business that should have LOWER margins than IVFH,
US Foods paid .56x revenue
for a much larger business.... so, you can extrapolate several things from that. They were probably expecting corporate efficiencies in the combined entities, greater scale, and the like. If US Foods would buy IVFH, then, they could save executive salaries, which would be a big bolster to earnings of the subsidiary, in terms of earnings and cash flow. Additionally costs such as audits and the like, just for being public, would likely go down due to the scale of US Foods- IVFH audit fees were .2% of revenue vs .01% of revenue for US Foods. ) The same extrapolation could probably be made for other corporate expenses. The fixed costs of being a public company are VERY substantial, and start to not eat away profits, as a company scales up.
This said- I am merely doing this as a valuation exercise. I am NOT suggesting a sale of the company. There is much growth for management to continue to oversee.
Anyway, to reiterate the TL;DR thesis:
Other companies in this industry have been sold for in excess of .55x revenue, which would imply a ~2.7x upside for the stock- meaning it could trade in excess of $.80/share. I currently see no reason why this company should not currently trade for its pre-covid levels of more than .50 cents a share, and even more than a dollar a share, once their operations show their true potential. We can see that they are delivering on this, as I type.
Given the company price, in relation to book value, it would be impossible for you to simply "start up" this company for what you can buy it for in the marketplace. It would take YEARS to build the infrastructure, inventory, customer relationships, employee base, and US Food Contract. You get all of the infrastructure for free at present prices of the common stock.
As shown, IVFH is currently selling at a very compelling price with a great runway for growth. Due to the diversification of the business, from the acquisitions of Mouth.com and iGourmet, the company will be able to survive COVID, and be positioned to grow a ton.
Disclosure: I am long IVFH. Assume everything that I wrote here is wrong.
