Provided to subscribers August 27th.
Here’s the latest from Canadian Value Investors!
Seneca Foods NASDAQ: SENE.A – Canning Cash
Disclosure: We own this one.
Seneca is our kind of boring company. It produces canned and frozen vegetables and fruits and has been operating since 1947. It has historically not been a great business to be in, but recent performance, share buybacks, and industry dynamics have made it interesting. We argue:
-The industry has continued to consolidate, and it appears that competitors are becoming a bit more rational. The Company, and industry in general, have been acquiring competitors and then consolidating operations to improve costs (in fact, Seneca is one of two companies making up 90% of canned vegetable production in the U.S.). For example, at Senenca, full-time and seasonal staff headcounts are down 15% and 50% since 2010 on higher sales.
-The Company’s LIFO accounting obscures underlying performance.
-It is trading at low adjusted earnings multiple, can be argued to be a net-net depending on your perspective of inventory and physical assets. More importantly, with continued share buybacks this might be quite good. But, earnings volatility and tough industry dynamics do give us pause.
Seneca 101
There are two pitches we want to point you to:
-Overview of the idea - https://www.overlookedalpha.com/p/seneca-foods-stock
-Harris Perlman notes and related X thread - https://twitter.com/OtterMarket/status/1687608891348025344
This article is meant to supplement their work. Now let’s get into the details. Here’s the last decade of performance. What is our adjusted P/E? See next.
The Company and industry in general have been acquiring competitors and then consolidating operations to improve cost. There have been a lot of acquisitions and a lot of plant closures.
“In August 2006, the Company acquired Signature Fruit Company, LLC, a leading producer of canned fruits located in Modesto, California which was sold during 2019. In 2013, the Company completed its acquisition of 100% of the membership interest in Independent Foods, LLC. In April 2014, the Company purchased a 50% equity interest in Truitt Bros. Inc. In 2016, the Company acquired Gray & Company and Diana Foods Co., Inc., each leading providers of maraschino cherries and other cherry products. The plants acquired are in Hart, Michigan and Dayton, Oregon. During 2018, the Company purchased the remaining 50% equity interest in Truitt Bros., Inc. making it a wholly-owned subsidiary. During 2019, the Company sold its Lebanon frozen packaging operation and its Marion Can Plant. During 2020, the Company sold part of its Rochester, Minnesota Plant and exchanged its Sunnyside, Washington Plant for part of its investment in CraftAg. Also during 2020, the Company acquired a plant from Del Monte Foods in Cambria, Wisconsin”
As noted by Harris Perlman, a key competitor seems to be getting smarter (see article for additional discussion of competition).
After a few years of [aggressive pricing/promotion] Del Monte Pacific had managed to nearly kill itself in an effort to win market share. It had taken on a lot of debt to buy the US business, and by 2017/2018 the US business was making an operating loss. Something had to change. The company brought in new leadership, and started restructuring. They stopped competing against Seneca in private-label manufacturing. In 2019 they closed some of their plants, and even sold a couple to Seneca. New management raised prices and turned their focus towards higher-value packaged foods.
See the “new” Del Monte turnaround pitch per their IR team. https://www.delmontepacific.com/hubfs/pdf/DMFI_presentation_FINAL.pdf
Adjusted earnings – “LIFO Reserve Adjustment”
Seneca uses last-in-first-out accounting for their financial statements and taxes, while they use FIFO for financial covenants and management compensation.
An overview of LIFO vs FIFO be found here, but effectively this means that in an inflationary environment it helps Seneca reduce/delay cash taxes while understanding the current earnings power of the business. https://www.investopedia.com/articles/02/060502.asp
The impact is meaningful, particularly with the recent COVID inflationary bulge. Of course, this means that if tax rules change there is a tax bill due, and as of this spring, “should LIFO be repealed, the $41.4 million of postponed taxes, plus any future benefit realized prior to the date of repeal, would likely have to be repaid over some period of time.”
Interest rate risk real life example
They are being impacted by higher rates, but it appears manageable. Leverage is seasonal and the recent bulge, and leverage in general, is driven primarily by inventory and secondarily by acquisitions (more so in the 2000s).
