Earnings from IEHC, New Century and Hanover Foods

IEHC reported 2015 earnings of $0.79 versus $0.63 a year earlier. Revenue increased to $16.4 M from $15.4 M a year earlier. Gross margin was was slightly better; 37% versus 36% M a year earlier.

Today, IEHC is a growing company trading at 7.7x earnings. It has no long-term debt. And it trades at book! If it trades 25% higher at 10x earnings it would still be undervalued.

A new blogger NoName Stocks has written a tremendously detailed post on the earnings results. So, I feel no need to repeat what he wrote. But I'll summarize and emphasize some important points. The company increased book value by $1.8 M as a result of the increased retained earnings. This amount is not reflected in cash however. It is instead reflected mostly in inventory and, to a lesser extent, accounts receivable and PP&E. The report stated that order backlog is up to $8.7M from $5.9M a year earlier. All this indicates that the company is experiencing a secular increase in demand for its products. The company needs to increase production capacity and it is in the midst of doing that. The company purchased several new machines. While it is doing that however, margin may temporarily compress. So, it is good news that margins have been flat at 37%.

New Century Group Hong Kong (HK:234) reported earnings of 1.71 HK¢ versus 0.52 ¢ a year earlier. The stock spiked to 25.5 ¢ on the news. See the chart below. The stock has twice spiked in the last year, each time on earnings results — in November 2014 and May 2015.

The stock carries 25.5 ¢ of equity per share. And the balance sheet is liquid. 43.2% of the balance sheet is investment properties, 35.2% is cash, and 26.3% is in stocks. So the market value should be close to the book value. Anyone looking at the chart must be puzzled as to why the stock can drop to the 13 ¢ range. The last time it happened was just a few weeks after the earnings announcement. And maybe the following picture of a typical brokerage firm shows why. While in US markets retail investors make up around 40% of stock ownership, in China it is 80%. Many of the retail investors buy stocks in those types of operations. They are basically people who want to do online trading but who do not have home computers setup for it.

	HNFSA
Price	102.500
Market Cap	76.49 M
P/E TTM	12.1 x
Div yield	1.1 %
P/BV	0.34
ROE	2.8 %

From what I can gather, these investors are not really investors, but speculators. And that is why the Chinese stockmarket has gone through record highs followed by a 35% crash. I guess that this effect has also infected Hong Kong, either through the Shanghai and Hong Kong interconnect or some other means.

Hanover Foods reported another underperforming quarter. So far in Q3 the company is on track to earn around $8M for the year. The company's operating margin was 3.3% versus 2.9% a year ago. But this is such a drop from 5% just a few years ago. I have no idea why this company has such low margins. The company also had almost no cash flow because it spent all the year's profits on inventory buildup. Again, I have no idea why. On the plus side the stock trades very low relative to book and at least is still profitable. Sooner or later it will turn around and improve its margins — or at least I hope. But in hindsight, I wish I never got involved with this stock.

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.

Why I Bought Hanover Foods

Price	$ 122.00
Market Cap	$ 91.5 M
P/E (2012)	6.7 x
Div yield	0.9 %
P/TBV	0.45
ROE	6.2 %
LT Debt/TBV	0.11

Recently, I bought shares in an obscure U.S. food company I had known for about a year. I first heard about it from Oddballstocks — one of the best investment blogs out there, by the way.  The company is Hanover Foods (OTC:HNFSA). The company is not really public so it doesn't have to file with SEC. I took a while to invest with the company because I couldn't get access to their financials. I also wasn't sure how I could get access to the financials once I became a shareholder.

Hanover Foods makes the food products shown above. I do not ever recall buying their products or even seeing it at the grocery store. But I am not a person that studies a companies products when I invest. I focus on financial statements to make investment decisions.

Hanover Foods was a pretty straightforward decision once I had access to the financials. The company like many of my smallcaps, is in a staid business, trades at less than ten times earnings, and less than tangible book value.

In addition, the company is "dark", which could be a plus as well as a minus. When a smallcap company is dark it is under the radar of most investors. This could mean I can build a position at a low price. But of course someone can argue that the company can stay that way indefinitely. But I have faith in the markets and all securities will reach their fair values sooner or later.

Given the great numbers for the company the reader may ask what is the catch, other than the fact that the company is an obscure smallcap. Some internet sources especially Oddballstocks have explained the ownership strife and analyzed the company here and here. The company was founded by Harry Warehime. His descendants are still in control of the company. His grandson John Warehime is the current CEO, and half the board seats are held by the Warehimes. However, the family members are bickering incessantly. And some of their dirty laundry is even documented in lawsuits. From what I can gather there are people who second hand knowledge of the family and for them it appears that issue is about control and not money. As a minority shareholder, I want to ensure that those in control do not cheat the minority, and that the family bickering does not destroy the company. Regarding the first point, the family does not seem to be united so they can't be working together to take away value from minority shareholders. And regarding the second point, this has been going on for decades and in that time the company has grown earnings and equity. For details, the reader can refer to Oddballstocks.

A final issue is the lack of transparency regarding the actual diluted shares out there. The company has various stock option and incentive plans. But from what I have read, it appears to be in the range of 700-800k. So I'll use the mid-point: 750k.

Overall, this company is pretty simple and straightforward and I trust others' research. However, because this company isn't that transparent, I don't have a huge position. But if the reader wants to invest in this stock, she should do her own research! Don't do what I did, which is to rely on information in blogs like this one.