Hanover Foods 2014 Results

HNFSA
Price	$ 110.000
Market Cap	$ 82.08 M
P/E TTM	12.0 x
Div yield	1.0 %
P/BV	0.37
ROE	3.1 %
LT Debt/Equity	0.003

Hanover Foods just released its 2014 year-end results. Revenue was $429.0 M versus $443.8 M the previous year. Income was $6.9 M versus $12.1 M the previous year. Gross margins fell to 10.5% from 11.6%. Management did not make a single comment to explain the drop.

However the report did clarify the matter of the total outstanding shares. Apparently, the internet and blogsphere has been confused what that number is. It is a total of 746k A and B shares. A and B shares have same economic value but only B shares have voting rights. The company also gave hints as to the value of the shares. The company has a small amount of outstanding B shares in its employee incentive plan. The company at times buys back these shares when vested from the employees at $155. This is a $45 premium over the most recently traded A share price. The company does this probably because there is no real market for the B shares. I own the A shares, which are much more commonly traded on OTC.

The company made progress to reduce long-term debt to virtually zero. It also increased cash by $3M. So at least management isn't squandering earnings. But there is no getting around the fact that this is a low-return business. A 3.1% return on equity means that this business is no better than 10-year treasuries. Despite this I own this stock because it trades at less than 1/2 book. This is the classic cigar butt. I think and hope that this company can be acquired for twice the market value. But I have no idea whether the Warehime family want to sell. But while we all wait for some kind of an exit scenario, the company must work on improving operations. I have yearly data going back 4 years and it shows a distributing pattern. See below (all numbers are millions).

	2014	2013	2012	2011
Revenues	428.9	443.8	439.0	425.1
COGS	383.9	392.3	380.2	371.6
Gross margin	10.5%	11.6%	13.4%	12.6%
Operating margin	2.4%	3.8%	4.8%	4.3%
Net income	6.9	12.1	13.6	12.3
Equity	221.1	213.3	200.9	188.8

Again, I don't know the reason(s) for the decline. I can only speculate that commodity prices may have played a major role over the last 4 years. But commodities prices are coming down worldwide. I will closely watch the results in the coming quarters. I certainly hope and expect it to improve.