High Liner Foods (HLF.TO) – August 2016

It has been over 3 years since I last reviewed High Liner Foods Ltd. To date, HLF.TO is still one of my favourite companies as it was as the first that I truly analyzed, and over the years it has been an impressive performer in my portfolio. At a high level, High Liner Foods is a supplier of quality seafood dishes and supplies to both the retail and commercial markets, here and in the US. They have operations throughout North America, and have grown over the years both organically and through acquisitions. Their own corporate snapshot best summarizes the firm:

High Liner Foods is the leading North American processor and marketer of value-added frozen seafood. High Liner Foods’ retail branded products are sold throughout the United States, Canada and Mexico under the High Liner, Fisher Boy, Mirabel, Sea Cuisine and C. Wirthy & Co. labels, and are available in most grocery and club stores. The Company also sells branded products under the High Liner, Icelandic Seafood and FPI labels to restaurants and institutions and is a major supplier of private label value-added frozen seafood products to North American food retailers and foodservice distributors. High Liner Foods is a publicly traded Canadian company, trading under the symbol HLF on the Toronto Stock Exchange.

Source: 2015 Annual Report

Analysis

From an analysis standpoint, HLF is an interesting company.  The company is headquartered in the maritime provinces, and pays and reports its dividend in Canadian Dollars, but since 2012 they have reported their financial statements in US Dollars.  This requires us to make some minute adjustments to EPS and Cash Flow per Share calculations, to ensure we factor in the appropriate exchange rate.  Moreover, this can swing the YoY growth metrics, since a shift in the USDCAD exchange rate can have a drastic effect on their bottom line due to foreign exchange gains or losses.

Below are the key evaluation criteria for HLF:

Category Criteria Threshold Current Value Pass?
Strong financial condition Current Ratio 2.30 1.50 YES
Earnings Stability Number of most recent years of positive EPS 9.00 3.00 YES
Earnings Stability Number of consecutive years of negative EPS 1.00 1.00 YES
Dividend Growth Compound Annual Dividend Growth 0.21 0.02 YES
Share Price Growth Compound Annual Share Price Growth 0.12 0.03 YES
EPS Growth Compound Annual EPS Growth 0.23 0.03 YES
Moderate P/E Ratio P/E 16.20 15.00 NO
Moderate P/BV Ratio P/BV 2.39 1.50
Moderate P/E*P/BV Ratio P/E * P/BV 38.72 22.50

And here is some of the fundamental data underlying the above evaluation criteria:

Year EPS Dividend per Share Dividend Payout Ratio (EPS) Dividend Payout Ratio (FCFS) ROE P/E Ratio Book Value Price to Book Value (P/BV) Net Income (000s) P/E × P/BV
F2005C ($1.9639) $0.1000 (5.0918%) 30.2774% (60.5188%) (2.3168) $6.4903 1.4021 ($41505.0000) (3.2483)
F2006C $0.1531 $0.1000 65.3106% 21.0671% 4.4303% 28.5734 $6.9121 1.2659 $3156.0000 36.1710
F2007C $0.2910 $0.1000 34.3585% 19.0414% 4.6450% 16.5780 $12.5316 0.7701 $6079.0000 12.7659
F2008C $0.4400 $0.1100 25.0003% 13.8824% 8.5031% 7.9547 $10.3490 0.6764 $13252.0000 5.3805
F2009C $0.5370 $0.1350 25.1377% 17.0828% 12.5713% 8.6120 $8.5439 1.0826 $19747.0000 9.3236
F2010C $0.6208 $0.1650 26.5784% 10.3864% 13.5665% 13.0878 $9.1520 1.7756 $19985.0000 23.2383
F2011C $0.6016 $0.1950 32.4117% 12.9113% 11.2551% 13.5880 $10.6909 1.5293 $18180.0000 20.7806
F2012 $0.0725 $0.2100 289.7152% 7.9876% 1.4365% 217.4934 $10.1433 3.1085 $2203.0000 676.0686
F2013 $0.5491 $0.3500 63.7394% 26.1210% 16.9814% 43.5613 $6.0805 7.8678 $31356.0000 342.7317
F2014 $1.1463 $0.4100 35.7677% 16.4163% 15.3827% 19.7682 $6.4234 3.5277 $30300.0000 69.7371
F2015 $1.3284 $0.4650 35.0042% 20.7587% 14.7522% 11.7057 $6.5064 2.3900 $29581.0000 27.9761

 

HLF’s share price was on a bit of a tear up until 2014, and it has been dropping since then.  I don’t necessarily see this as a bad thing – in 2014, they were trading at more than 3.5× book value, so a pull back from that price provides more buying opportunities.  Another important point is that in December 2013 HLF was added to the S&P Canadian Dividend Aristocrats Index.  The addition to this index would theoretically increase trading volume as the any ETFs based on the index would be buying and selling shares of the underlying companies, HLF being one of them.  This addition was short lived how however: it was removed in February 2015 because it did not meet the average daily value traded criteria1.

High Liner Foods - 10 Year Stock Price - 2005-2015

High Liner Foods – 10 Year Stock Price – 2005-2015

As a long term investor who is more interested in the continuous passive income from holding the company in my portfolio, rising or falling share prices do not necessarily spook me. Falling share prices are a good thing, since they give me more opportunities to add to my portfolio, provided the underlying fundamentals remain strong. That said, I am more interested in the company’s dividend, its dividend growth, and the margin of safety for the dividend vis-à-vis the ability of the firm to consistently pay that dividend.

HLF.TO - 10 Year Dividend, EPS, and Free Cash Flow per Share

HLF.TO – 10 Year Dividend, EPS, and Free Cash Flow per Share

HLF.TO - 10 Year Dividend Payout vs EPS and Free Cash Flow

HLF.TO – 10 Year Dividend Payout vs EPS and Free Cash Flow

2012 is one year that stands out when examining the  historic fundamentals for HLF.  Their EPS over 2011/2012/2013 went—on a split and currency adjusted basis—from $1.20 in 2011, to $0.14 in 2012, and back up to $1.10 in 2013.  The main reason for this was due to one time write-down charges due to some of their acquisitions in 2011 and 2012, which reduced their net income from $18,180,000 in 2011 to $2,203,000 in 2012.  This one time charge drastically reduced EPS, and helps to explain the huge spoke in the P/BV × P/E value for the same time period, illustrated in this graph:

High Liner Foods - 10 Year P/E × P/BV

High Liner Foods – 10 Year P/E × P/BV

Notice how in 2012 the P/E × P/BV spiked at almost 700, but then dropped down to ~350 in 2013, before returning back to more realistic levels in 2014 and 2015 of 69.7 and 28.0 respectively.  All that aside, if we were to naively look only at the dividend payout ratio relative to EPS we would be very worried; dividend as a percentage of EPS was 289.7% in 2012!  However, if we inspect dividend payout ratio to the free cash flow per share (green line in the Dividend Payout Ratio (vs FCF) graph), we see that the dividend has consistently been below 21.1% since 2006 (it was marginally higher at 30.3% in 2005).  Moreover, notwithstanding the drop in 2012, the EPS on a year over year basis has been generally trending upwards; 2012 was the exception, not the norm.

Recommendation

Over a 10 year time horizon, HLF has had positive dividend growth, EPS growth, and share price growth, with compounded annual growth rates of 15.0%, 27.1%, and 11.8% respectively.  Even taking into account the pull-backs since 2013 in the share price, and the EPS drop in 2012, the stock over a longer time horizon (e.g. 10 years) has been very strong. My recommendation criteria would place HLF as a HOLD, primarily because the P/E × P/BV multiplier is very high at 28.0, which is higher than our threshold of 22.5. However, given the relative strength of the dividend, and HLF’s impressive 15.0% compound annual dividend growth over the past 10 years, I would consider purchasing it even today, unless there were more suitable companies to buy on the open market. Either way, I would purchase on dips: purchasing at any price strictly than $13.95 on the open market would push us below the magic 22.5 threshold for P/E × P/BV, based on the F2015 EPS and Book Value.

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1. As per an email exchange with S&P Dow Jones Indices. Email me for more information or for a copy of the exchange.


Analysis: High Liner Foods (HLF.TO)

High Liner Foods holds a special place in my investing heart, because it was the first stock that I ever performed my own analysis on. Since purchasing it in 2010, it has soared over 50%, making it an incredibly valuable part of my portfolio. High Liner’s success is what really pushed me into the value investing sector, whereas before I was always trying to time the markets as a day/swing trader. High Liner’s share price growth has been impressive, showing an 8.57% compound annual rate of return from 2002-2011.

High Liner Foods Share Price Growth, 2002-2011

Fast forward two years, and things are even better. On September 20, 2012, High Liner Foods announced that they had been added to the S&P/TSX Small Cap Index, which was a major accomplishment. This addition brought about added exposure and liquidity to the stock as it is now traded in some of the S&P/TSX Small Cap ETFs such as iShares XCS.

Given all of these changes, I felt that High Liner warranted a refresh of my initial analysis. While I discussed my initial evaluation methodology previously, reviewing my original analysis reminded me of some of the fundamentals I should be looking for. That said, I’ll be expanding my initial evaluation methodology, starting with High liner. So, what do we have at first glance?

Criteria Value Threshold Pass?
Strong financial condition Current Ratio 2.05 1.50 YES
Earnings Stability Positive EPS over last 3 years 8.00 3.00 YES
Earnings Stability Less than 2 consecutive negative years 0 2 YES
Dividend Growth Dividend Growth 30.75%
(from 2003-2009)
2.00% YES
Share Price Growth Minimum 3.00% compound growth over the past 10 years 9.82% 3.00% YES
Moderate P/E Ratio P/E 8.61 15.00 YES
Moderate P/BV Ratio P/BV 1.09 1.50
Moderate P/E*P/BV Ratio P/E * P/BV 9.38 22.50

In the above, the one that needs a real explanation is the P/E, P/BV, and P/E×P/BV section. I consider a firm to be overpriced if its P/E is greater than 15, its P/BV is greater than 1.5, or if the combined value of both is greater than 22.5. This combination factor allows for some flexibility.

If the above looks familiar, it probably is. For the most part, this is a screen taken from Benjamin Graham’s The Intelligent Investor. The above values are based on the 2009 fiscal year, which is the data I originally used for selecting the stock. However, looking at 2011 data, we have a drastically different story:

Criteria Value Threshold Pass?
Strong financial condition Current Ratio 1.31 1.50 NO
Earnings Stability Positive EPS over last 3 years 10.00 3.00 YES
Earnings Stability Less than 2 consecutive negative years 0 2 YES
Dividend Growth Dividend Growth 28.03 2.00% YES
Share Price Growth Minimum 3.00% compound growth over the past 10 years 5.37% 3.00% YES
Moderate P/E Ratio P/E 13.59 15.00 YES
Moderate P/BV Ratio P/BV 1.53 1.50
Moderate P/E*P/BV Ratio P/E * P/BV 20.78 22.50

While all of the initial tests passed, the price of HLF.TO is now incredibly high; the 2011 chart is based off of a $16.35 share price, but the stock is now trading at $23.94, which yields a P/E of 19.90, P/BV of 2.24, and P/E×P/BV of 44.55! (This is assuming we use the EPS of the fiscal year, with the October 1, 2012 share price). The stock would definitely not be on my radar at the moment because it is incredibly overpriced.

Initial screen aside, the other fundamentals look solid.

HLF.TO Dividends and Dividend Payout Ratio

EPS vs. Dividend Payout Ratio

Observing the above, there has been consistent growth in the dividend over the past five years, and the dividend payout ratio has — except for 2005 — remained consistently below 50%. In adition to this, EPS has been inching slowly upwards since 2005. One may be a little wary of the huge EPS in 2003 which suddenly dropped by 2004, but the 2003 blip was a one time event “realized on [High Liner’s] exit from the harvesting and primary processing businesses,” as discussed in the 2003 annual statement.

ROE, P/E and FCF all show simila rpositive trends, once one ignores the 2003 event:

High Liner Foods ROE 2002-2011

High Liner Foods P/E Ratio, 2002-2011

High Liner Foods Free Cash Flow per Share, 2002-2011

While FCF has been a little week, overall High Liner has been a solid performer. Good management has seen the company shedding businesses that it no longer needs (such as food processing in 2003 and the Italian Village line in 2005), and making good acquisitions such as their purchase of Icelandic Group in 2011. All in all, the firm has strong fundamentals, a good management team which is focused on increasing the value of the business, and a solid (but well managed) history of increasing dividends.

Depending on what the fiscal 2012 results are, I would consider picking up HLF.TO on dips in 2013, provided the combined P/E×P/BV ratio was less than 25 (higher than my regular threshold, but I woudl be willing to give a little on an excellent company).