Wednesday, June 24, 2020

Innovative Food Holdings IVFH (1 of 2)

DTEJD1997 here: 

I am guilty of being disorganized, doing too many things at once, and not fully completing what I start.  That happened with IVFH. Fortunately, I've known Jeff for a long time.  He is MUCH more organized  than I am.  He wound up helping me with this research and idea, doing actual field work, and picking up where I have left off. I did the initial work and analysis, but Jeff carried on and did a lot of the work and some very detailed analysis. Thus, this is a two part analysis. I started it, and Jeff finishes it off. 

The opportunity in (IVFH) kind of fell into my lap. IVFH has been on my extensive watch list for a few years. It has been near the bottom for a lot of that time. IVFH has had some difficulties of late, a lot of shareholder frustration, and perhaps most importantly, shareholder selling and a declining share price. The price has recently been as low as $.15/share in the recent panic. It has since climbed up to just above $.30/share. 

A couple of years ago, IVFH has made some excellent money, good returns on equity and capital. IVFH also has a lot of assets, cash, inventory, intellectual property and some interesting real estate. They then made some acquisitions that they had a LOT of expenses with, margins narrowed, earnings & cashflow went down, investors got frustrated and fatigued, and the stock price down near the bottom of the watch list it went... 

So here is how I became much more aware of the current opportunity in IVFH: 

I sell items on Ebay, and have for over 20 years. Late one night, something unusual popped up on my Ebay feed. That oddball item was “All Natural Pure Bee Honeycomb by Ziyad “ This is a “honeycomb” with honey in it. Yum Yum! I found it to be kind of unusual. This is not something that I would be thinking about purchasing online. The instant I saw it though, it registered with me. I've actually seen this item for sale in a great grocery store (Al-Haramain) that I frequent in Hamtramck MI. Hamtramck is a very dynamic small city, with lots of recent immigrants and a vibrant business community. There are many tremendous grocers there, with Al-Haramain being my "go-to" favorite.  As I am familiar with the Ziyad brand, I clicked on the Ebay link to find out more. Turns out, it is being sold by a seller with the name of “igourmet”.  Igourmet? I've heard of that name before...they are subsidiary company of IVFH!  What a small world!  I found it interesting that this item was being sold for $13.99 on Ebay, there is also a delivery fee of $5.99. I've seen that item for sale for less in Hamtramck....They are almost certainly making good margins (percentage wise) on that item. Perhaps most importantly of all, they have sold well over 100 of these honeycombs! That is pretty darn good for Ebay! 

So I did some more investigating....igourmet's feedback rating has been increasing quite substantially lately. Further, it seems to be accelerating in the last 60 days or so. Undoubtedly, a chunk of that is due to the Corona-virus pandemic as people are more likely to want to have food delivered to them. 

Igourmet also has a substantial offering of food items on Ebay, about 2,400 items. 
Igourmet also has a very high feedback rating, well over 99% As a seller on Ebay, I can say that is quite an accomplishment. It is somewhat easy to get a 98% or 99% feedback rating over 100 transactions....try doing that over SEVERAL THOUSAND. Try doing that feedback over the course of a a year.  That is NOT going to be easy, you are most assuredly going to have be doing something right in order to accomplish that.  Whoever is running igourmet's Ebay store is capable and doing a good job. 
As much feedback as igourmet has gotten on Ebay, not every transaction gets them feedback from the buyer. In my experience, I get about a 40% conversion ratio (buyer's who leave feedback). The items that I sell are usually very expensive technical items, usually bought by sophisticated, professional buyers. So I probably get a very high conversion ratio. I strongly suspected that igourmet is NOT getting a 40% conversion ratio. What if they are getting 25% or so? In order to get 1,000 feedback in a month, they would have to being at least 4,000 transactions monthly.

What is the average dollar value of that transaction? $10? $20? $40? more? Is the average buyer, buying more than 1 item at a time? I am going to guess that there is a fairly high percentage of buyers who buy MORE than 1 item. Could their average transaction be about $30? Take 4,000 transactions at $30, and that comes out to about $120,000 a month in sales on Ebay. On a yearly basis, that is well over $1,000,000. Now part of this is an upswing due to the CV-19 pandemic...but igourmet has been selling actively on Ebay for a while.  Igourmet's sales were decent BEFORE the Covid epidemic.  During the Covid epidemic, sales have exploded.  and they are building the business on Ebay as time progresses. I think in time, even after the CV-19 passes, igourmet will still be selling a LOT of things on Ebay. 

What if I am off in my assumptions? Could it be that they are actually doing 4-5 thousand transactions a month on Ebay? What if the average transaction is MORE than $30? Could it be $40? Maybe? That is not some crazy “pie in the sky” interweb type of thing. Maybe $200k a month in sales? If so, that could EASILY be $2mm a year in Ebay sales alone. 

Now here is where it really gets interesting... 

If you go back through IVFH's quarterly and annual reports, e-commerce is discussed. In the regulatory filings, Ebay sales are NOT mentioned. In 2019, IVFH did about $10mm in e-commerce sales, without mention of Ebay.  If Ebay's sales are exploding higher, what about their selling on ?, their own in house websites? I'm going to guess that they are all going to be SUBSTANTIALLY higher than last year, as what is going on in Ebay. 

So with these admittedly “rough assumptions” I bought a bunch of shares just below $.25/share. At $.25/share, the market cap of IVFH is about $8.6mm. I think that is pretty interesting for a company that was doing over $10mm a year in “e-commerce” and had not even discussed that they were selling on Ebay. That indicates to me that Ebay is a relatively small component of their e-commerce sales. However, $1,000,000 in Ebay sales is not insignificant for a company with a market cap of $8.6mm. 
I suspected that investor pessimism had gone too far, and perhaps everybody is/was fatigued, and no investor was paying much attention? Could it possibly be an inefficient market for IVFH, something not being properly priced?  This is exactly the type of situation where I think I can get some interesting results? 
Of course, there are lots of moving parts, and IVFH has some real estate and other interesting things. 

So I took my initial research and passed it on to Jeff.  Jeff evaluated my initial work, and he thought to do some things that I didn't do or even consider, and here are his thoughts/insights....


Disclosure: I am long IVFH. Assume everything that I wrote here is wrong.

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