2023-11-02 07:10:00 ET
Summary
- Seneca Foods is a microcap canned vegetable producer trading below the value of its net current assets.
- The company was booted from the S&P 600 index, resulting in forced selling and a 30% drop in share price.
- Seneca Foods has a strong position in the market and the ability to pass along price increases to customers, making it undervalued.
The following segment was excerpted from this fund letter.
Seneca Foods Corp. ( SENEA )
Moving on to our new position in Seneca Foods, I may have just one-upped even our most boring investments by way of owning this microcap canned vegetable producer, the largest in the US. As a company trading below the value of its net current assets, along with real estate held on the balance sheet that could exceed the entire market cap of the business, Seneca Foods is a throwback to the Graham and Dodd style of buying companies below their net current asset value. However, unlike most Graham and Dodd 'cigar butt' investments, Seneca Foods has an actual operating business. One that is not in decline. In fact, the industry in which Seneca Foods operates has changed in such a way that stable market share and the resulting higher earnings should be the norm moving forward.
Furthermore, there are clear cut reasons why the stock is mispriced. First, Seneca was booted from the S&P 600 index earlier this year, which resulted in forced selling, driving the share price down around 30% despite no significant changes to the business. Second, Seneca doesn't screen particularly well. The company has both a large debt load (due to inventory purchase requirements) and understated earnings given their inventory accounting methodology. If investors don't make the necessary earnings adjustments, GAAP earnings look non-existent. Third, management runs their business like a private company, with no IR strategy, no earnings calls, and no investor outreach (it took jumping through a few hoops to get management on the phone).
The canned vegetable business is tough and has historically been a battle for market share among a few large competitors, resulting in price wars driven by tough periods of seasonality and ever-changing cost structures. Following the exit of Del Monte Foods from the private label canned vegetable business, Seneca and smaller private competitor Lakeside Foods now control around 85% of the market, which will aid in the investment case moving forward, given Seneca's substantial capacity versus their peers. Rather than pricing wars this time around, Seneca has been (and will be) able to pass along price increases to their customers, which will prove vital given the COVID-related increases in nearly all of their input costs. The importance of these factors can't be overstated, as reduced industry supply and a more rational competitive environment means that these changes are more durable than Seneca is being given credit for.
Outside of the index removal, which proved a timely buying opportunity, a great time to purchase businesses in commoditized, highly competitive industries where they are fighting for market share is when the industry structure changes. There's a fairly well known investor who has also been successful investing against the backdrop of positive industry changes.
We were able to purchase our shares at a mid-single digit multiple of earnings, and our downside is well protected, which means we can be patient as the company works through their current volumes, moves through their inventory, pays down debt and continues to generate strong earnings. We've done well since our initial purchase, but I think the share price should continue to trickle upwards, where I peg fair value to be significantly higher than today's price.
Disclaimer: Past performance is no guarantee of future results. Investing involves risks which clients should be prepared to bear, including but not limited to partial or complete loss of principal originally invested. Investing in small and microcap companies can result in additional volatility and higher risk due to comparatively low market capitalization, more sensitivity to economic and market conditions, and more limited managerial and financial resources. In addition, small companies typically trade in lower volume, making them more difficult to purchase or sell at the desired time and price or in the desired amount. Please refer to Form ADV Part 2 brochure for more information about Greystone Capital Management and its personnel. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Greystone Capital - Seneca Foods: A Throwback To The Graham And Dodd Style