An Emerging Player In The Specialty Food Industry

This past summer, a few of us MicroCapClub members traveled to Florida to visit Innovative Food Holdings (OTCQB:IVFH), a company we had been doing due diligence on for several months. I profiled it on the club in early September, and the stock has made a nice run thus far in 2013, but I expect the move to continue into 2014. The company is well positioned to benefit from several major food trends, which a recent article highlighted. Comps United Natural Foods (UNFI) and The Chef's Warehouse (CHEF) are becoming valid threats to Sysco (SYY) in the coveted organic and natural food distribution segment. UNFI and CHEF have been on an acquisition binge for several years consolidating the specialty food distribution space. IVFH is perfectly positioned right in the middle of all of this.

Innovative Food Holdings is profitable, growing double digits, and has had 50 consecutive months of year over year growth. Company has many irons in the fire, now more than ever, and has visibility on multiple growth drivers on top of healthy core business trends. Recent years have been spent fixing the old management screw-ups, and repairing US Foods relationship, which is behind them. Additional distribution relationships will diversify revenue reliance on USF, and leverage existing catalog and infrastructure, with meaningful SG&A leverage as incremental revenue scales. Haley Group contributions could meaningfully expand gross margins in 2014 and beyond. Comps United Natural Foods and The Chef's Warehouse are trading at 25x 2014' EPS estimates. IVFH has a higher organic growth rate and higher margins than both comps, and I expect IVFH to earn $0.17 EPS for FY 2014. If you apply a 20 - 30 PE, this equates to a $3.40 - $5.10 PPS by YE 2014, or a return of 112-218% from current prices.

Innovative Food Holdings, Inc., through its subsidiaries, provides origin-specific perishables and specialty food products. It distributes approximately 7,300 perishable and specialty food products, including origin-specific seafood, domestic and imported meats, exotic game and poultry, artisanal cheeses, caviar, wild and cultivated mushrooms, micro-greens, heirloom and baby produce, organic farmed and manufactured food products, estate-bottled olive oils, and aged vinegars, as well as healthcare food products. The company serves restaurants, hotels, country clubs, national chain accounts, casinos, and catering houses.

Core Businesses:

• Food Innovations: Food Innovations is IVFH's white label specialty food platform used by US Foods (2nd largest Food Distributor in US/ $19 billion Sales). This relationship started seven years ago but really started getting legs three years ago. The company expects this relationship to continue to grow as the specialty food market grows and as the relationship expands within US Foods. You can see this relationship listed on USF linkedin page. .This is a vendor relationship so it's not exclusive which allows IVFH to potentially white label their program for other large distributors.


• Artisan Specialty Foods: IVFH acquired Artisan in early 2012 for 3x EBITDA. Artisan is a leading artisanal specialty foods distributor in the Chicago area. The acquisition is highly synergistic with Food Innovations. Artisan has it's own sales force, delivery trucks, warehouse, and over 400 customers in the Chicago area. Artisan sales have expanded beyond their core by USF being able to sell Artisan products through Food Innovations. The company is also working on a JIT (Just In Time) inventory/distribution system that is currently being beta tested. This would allow Food Innovations products to be delivered through Artisan's own delivery fleet, cutting down on shipping costs. http://artisanspecialty.com/


• Haley Group: Haley Group was acquired in early 2013. This company brings novel new food products to market by introducing them to US Foods or other major distributors and IVFH gets a negotiated per unit royalty stream. These products wouldn't normally fit in IVFH's product catalog, so this gives the company another bite at the apple so to speak. The company is very excited about a couple products in particular which they expect to launch shortly


• For The Gourmet: Direct to consumer specialty foods through its website at http://www.forthegourmet.com/. The company is looking to give this website an overhaul which currently does minimal sales (<5%) but is profitable on a standalone basis. The direct to consumer grocery space is very buzzy right now with Amazon's (AMZN) making headlines with Amazonfresh. Billions of VC capital has been spent and wasted in this e-grocer arena (think Grocery.com during the internet bubble), so the company is cautious on how they build out there program. The great thing is IVFH already has the hard part built for a direct to consumer platform (logistics- customer service - and sourcing).


• Food Hatch: This is the companies venture arm, sort of like a Shark Tank for Food. This is just giving them more ability to see new food ideas, and partner with them if it fits. Management said they have seen about 100 food ideas through Food Hatch and haven't invested/partnered on any yet. The interesting thing is a couple of the deals they passed on went on to be funded on Shark Tank. http://foodhatch.co/


• Other Assets: Company HQ in Bonita Springs, FL that they purchased from the bank in a short sale for $750,000 earlier this year, replacement value $1.9 million.

The company recently renegotiated with its convertible debt holders on very favorable terms which has led to shares starting to ascend closer to where the company should be valued. The company has 6.7m shares outstanding basic, but investors should really double that figure to be conservative. This is what I've done for all my proforma projections.

The company has grown annual revenues from $9.8 million in 2010 to $22.9 million for the LTM while maintaining positive operating income. Management's goal is 15%+ organic growth which is well ahead of its peer groups 5-8%. Innovative Food's current size is at a point where we will start to see benefits of scale. I expect the company to grow revenues at an 18% CAGR over the next three years not taking into account any acquisitions. The company should be able to produce pre-tax income of $2.3 million in '14 and $3.4 million '15 respectively. Even after doubling the basic share count to 13 million to be conservative, the company should produce adjusted EPS of close to 0.17 in 2014, and 0.26 for 2015.

United Natural Foods and The Chef's Warehouse have been growing aggressively by way of acquisitions, and I don't think it's too far fetched to think IVFH will be a likely takeout target at some point in time. I believe the company offers a very unique product offering in the specialty food industry that is not only adaptable to partnerships with major food distributors but also direct to consumer and food tech applications. Regardless of whether IVFH is ultimately acquired, shares are trading at a significant discount to its comps while having superior organic growth and margins.

Source: An Emerging Player In The Specialty Food Industry

Disclosure: I am long OTCQB:IVFH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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