Summary
- SENEA is in a line of business with low margins and returns on capital.
- The amounts going towards debt repayment can't go to other places like shareholder yield.
- Multiples aren't low historically, and the company itself won't grow its EPS in any meaningful way going forward.
Seneca Foods ( SENEA ) is a provider of packaged fruits, vegetables, and other foods. They operate 26 facilities within the US, and canned vegetables make up the majority of revenue.
seneca website
Originally founded in 1949, they've been publicly traded since 1995. Below is the long-term share price performance:
dividend channel
The business model is relatively simple, they aren't growers, they are the packagers. There aren't many publicly traded peers that do the exact same thing. Many of these peers are the big food companies that own dozens of brands and have a global footprint significantly larger than SENEA.
Company | Revenue 10-Year CAGR | Median 10-Year ROE | Median 10-Year ROIC | EPS 10-year CAGR | FCF/Share 10-Year CAGR |
SENEA | 1% | 6.3% | 4.5% | 20.2% | n/a |
DOLE * | 14.5% | 2% | 3.9% | -7.1% | n/a |
*3-year
Capital Allocation
The company's primary method of growth is through acquisition, they've made dozens along the way. This runway is now substantially shorter than in the past, as most of the purchases are smaller assets. Below we see how capital was allocated, in USD millions.
Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
FCF | 15 | 39 | -7 | 29 | -8 | -46 | 59 | 62 | 112 | -23 |
Acquisitions | 5 | 16 | 39 | 14 | 7 | |||||
Debt Repayment | 544 | 446 | 329 | 333 | 492 | 466 | 664 | 549 | 603 | 391 |
Repurchases | 30 | 1 | 34 | 6 | 3 | 5 | 8 | 13 | 4 | 39 |
They've never paid a dividend, and the buybacks have never meaningfully reduced share count over the long term. Share count was 12 million back in 2011, and now it sits at only 8 million shares outstanding.
Risk
There isn't a ton of downside risk on a fundamental level, the issue is that growth is plateaued while overall business quality remains below average. I usually am critical of companies emphasizing dividends over repurchases. In this case the issue is that so much is spent paying down debt that it leaves little room for dividends or seriously reducing share count. There's nothing inherently wrong with perpetual debt if it truly amplifies earning power and never reaches high levels, but that clearly hasn't happened here with SENEA.
To put the slow growth of this business into context, operating income in 1985 was $20 million, and in 2022 it was only $70 million. This is not the kind of business that a long term investor would like, the intrinsic value clearly doesn't increase decade over decade. So the risk is putting your capital to work in a stock like this, and participating in the lackluster results of the business fundamentally over the long run.
Valuation
A slow grower at a cheap price can provide nice returns for the short to intermediate term. Over the long run however, the valuation will have mostly worked itself out. Therefore, business quality will matter most over time, so the only reason to buy a below average quality business is if it's extremely cheap. Let's start by looking at the multiples comp and also historically.
Company | EV/Sales | EV/EBITDA | EV/FCF | P/B | Div Yield |
SENEA | 0.5 | 7.7 | -3.7 | 0.7 | n/a |
DOLE | 0.2 | 12.8 | 36.4 | 0.9 | 2.7% |
macrotrends macrotrends macrotrends
The multiples aren't low when compared to historical standards. These multiples shown above are trending upwards more recently.
I won't be using a DCF model for this stock, simply because I don't expect earnings to grow at this point. This means I won't even consider it as a long term investment. I'm not biased against slow growers, but they still need meaningful EPS growth if the top line barely moves over time.
Conclusion
This is a good example of a business that should just be privately held. It is below average quality, and this has been reflected in the long term share price performance. Shares have traded at a cheap multiple at various times, and some short term opportunities have been available, but the company is not undervalued at this point.
Even if the price declines, this stock would need to be watched closely for the right time to exit in a shorter time frame. The quality of the company overall is the reason why it has trailed the market in the long run. A smaller company should have an inherent ability to grow faster than a bigger company, so to see a company of this size underperforming versus the market shows that it lacks both growth and an ability to increase EPS.
For further details see:
Seneca Foods: Low Quality, Not Undervalued