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Summary

  • Healthy/natural products are growing very quickly due to growth in the frozen fruit and healthy snack categories.
  • Fruit PLUS Vitamins will add a proprietary item to the company's product mix that competitors will not be able to copy.
  • Margins are set to expand as the company freezes more of its own berries, begins manufacturing higher margin items and utilizes its additional plant capacity.
  • Inventure’s prospects have not been factored into the company's stock price because transaction costs from the company’s recent acquisitions depressed results last year.

Hidden Value in Inventure

Inventure (NASDAQ:SNAK) has positioned itself in many high growth categories and the firm's strategic initiatives will increase profitability moving forward. These factors have not been incorporated into Inventure's share price because of acquisition-related costs negatively affected previous results.

Business

Inventure manufactures products in the healthy/natural and indulgent snack category through its portfolio of owned and licensed brands. Its products in the healthy/natural category include frozen berries, smoothies, coffee products, kettle chips, specialty snacks and cereals. The company's indulgent segment consists of various snack items including different kinds of chips, fries and potato skins.

Management

In 2013, CEO Terry McDaniel was named Ernst and Young's Entrepreneur of the year. He and the rest of the firm's top executives are former tier one CPG (consumer packaged goods) executives that according to CFO Steve Weinberger "grew tired of big company bureaucracy and politics and wanted a more entrepreneurial environment" (Piper Jaffray Conference). In 2013, 47% of McDaniel's compensation was in stock awards. Management's experience is a huge plus from an investment perspective. Their decision to join Inventure, and specifically Mr. McDaniel's compensation plan, also illustrates that they are highly motivated and believe in the business.

Growth

Inventure has experienced substantial growth over the last several years in its healthy/natural segment due to increasing consumer preference for a healthy diet. Inventure has capitalized on this growth through its frozen berries, vegetables and smoothies as well as the healthy/natural kettle chips and snacks its sells through its Boulder Canyon brand. Below I outline some of the key growth drivers for the company moving forward.

The company's frozen produce business has consistently posted strong growth since Inventure acquired its first berry processing facilities in 2007. This growth is due to increasing consumer awareness of the health benefits of frozen food. According to Brian Young, Director General of the British Frozen Food Federation, "research over several years has consistently shown that frozen fruit and vegetables can have equivalent or higher levels of vitamins and nutrients compared to fresh" (The Grocer). Most "fresh produce" is picked before it is ripe so it can ripen en route and arrive at grocery stores ready-to-eat. It therefore does not develop the same amount of nutrient content it would accumulate on the tree or vine, and loses further nutrient content during shipment. En route, the produce is also at risk for contact with airborne diseases. By comparison, frozen produce is picked only when it is ripe, and is then frozen within a few hours. In addition to retaining vital nutrients and preventing interaction with air borne pathogens, this process also limits waste by deterring rotting. As information continues to surface about the benefits of frozen produce versus its fresh counterpart, demand for the category should continue to grow.

The company's frozen products are perfectly aligned with this trend. Inventure sells frozen berries, primarily to Costco, and frozen vegetables through its recent acquisition of Fresh Frozen Foods. CFO Steve Weinberger stated in April that Costco sells more frozen berries than any other grocer (Piper Jaffray conference). Inventure's berry sales were up 23.5% last year.

Retailers usually only stock one or two frozen produce manufacturers at a time, so the fact that Inventure is already placed on shelves in high growth retailers such as Costco gives it a distinct advantage over competitors. The company's Rader Farms berries are in every Costco around the world, paving the way for international expansion as Costco enters new markets. Its recent acquisition, Fresh Frozen Foods, posted revenues of $56 million in 2012 (Inventure 8-K/A), the last full year it reported before being acquired by Inventure. According to Inventure CEO Terry McDaniel, Fresh Frozen has grown by an average rate of 15% over the last three years (Inventure Q3 Earnings Call).

Inventure has also taken steps to enhance its product mix by incorporating a value-added component into its frozen offering. The company created Fruit PLUS Vitamins, which is frozen fruit that has additional vitamins and nutrients sprayed onto it that have been extracted from other fruit. The product is patent pending and should provide a proprietary element that will help deter margin squeeze as new competitors inevitably enter this category.

The healthy snack category is the other major area in which Inventure continues to see growth. Healthy snacks have been booming as consumers shift from organized meals to more on-the-go snacking. Product innovation that is health oriented is driving growth in this category.

Inventure's Boulder Canyon brand has done an outstanding job of capitalizing on key sub-trends in this category with pace setting innovation. This year, for example, the company has responded to consumers' demand for protein and quality grains with its Protein Crisps and Ancient Grain chips. The Boulder Canyon brand grew 23.5% last year without substantially expanding distribution, while the IRI Potato Chip category, a gauge of the potato chip industry, grew just 2.1% (Annual Roth conference). The company plans to roll out Boulder products to new geographies in the US this year. Territorial expansion tied with continued product innovation should continue to drive the brand's growth.

Operating Efficiency

Inventure was not as cost efficient in 2013 as in the previous year.

2013

2012

Gross margin

18.04%

19.92%

EBITDA margin

7.69%

8.66%

Operating margin

5.03%

6.13%

Profit margin

3.07%

4.02%

Looking at data created from the company's latest 10-K, we see margins were down across the board due primarily to a decline in T.G.I. Friday's sales and subsequent replacement with co-packing sales. Margins were negatively affected because the co-packing business has a much lower gross margin than Friday's. The higher revenue from the lower gross margin co-packing business is the reason for the overall weaker efficiency as operating, EBITDA and net margins were down even as SG&A decreased as a percentage of sales. I believe there are several reasons to expect Inventure's margins to substantially improve this year.

First, management has instituted several initiatives aimed at getting the brand back on track. Inventure will introduce new products like tortilla chips and popcorn as well as snack and pub mixes. Additionally, Inventure will roll Friday's out internationally this year. Management has noted that brand recognition in China is already very strong (Piper Jaffray conference), which should help the brand hit the ground running. Regardless of the success of these initiatives, Friday's will continue to have less of an effect on margins as Inventure's healthy/natural segment continues to grow at a faster rate than the brand. There is also substantial reason to expect margin expansion from the healthy/natural segment.

The company's two acquisitions in 2013, Willamette Fruit Company and Fresh Frozen Foods, will allow it to freeze a larger portion of the berries it sells, rather than buying frozen berries and reselling them. The Willamette acquisition was purchased specifically to achieve this goal and provides the company with additional freezing capacity. Additionally, the Fresh Frozen acquisition expands the company's high-margin frozen offering into another area, vegetables, and also gives it additional space to freeze berries as Inventure will take over Fresh Frozen's processing facilities. In-house freezing substantially reduces cost, and management speculates that the company will freeze between 50-60% of their berry needs this year, as opposed to 35% last year (Inventure Q4 Earnings Call).

Also, Inventure will be able to continue to leverage SG&A. The company has substantial capacity to expand production without heavily increasing operating expenses as its plants are currently operating at average rate of 61% of maximum capacity. Although the company intends to add a General Manager of Frozen Foods as well as a Boulder Canyon management team, revenue growth should outpace growth in payroll. Limited capital expenditures should also prevent spikes in depreciation expense. Finally, the company's key growth products, primarily its frozen berries and vegetables, require the lowest slotting fees, trade spending and advertising expenses within its product mix. The company's cost initiatives as well as its ability to expand revenues without significant investment in operations should enhance its profitability moving forward.

Looking at information created from Inventure's last 10-K filing, we see returns declined this year. The decline was due to several additional reasons besides the gross margin decline noted above.

2013

2012

EPS

$ 0.34

$ 0.40

ROA

3.89%

6.62%

ROE

11.19%

12.42%

ROIC

5.08%

9.10%

In addition to benefiting from stronger TGIF performance, 2012's results were positively impacted by the sale of Inventure's DSD business, while 2013 was negatively impacted by the acquisition of Willamette and Fresh Frozen. The companies were purchased late in the year and while their acquisition costs are reflected in Inventure's 2013 financials, it did not impact the company's net income. However, Willamette and Fresh Frozen should both have substantial impact in 2014. Adjusted for the deal costs of the 2012 sale and 2013 acquisitions, Inventure's earnings and returns would have been:

2013

2012

EPS

0.38

0.33

ROA

4.29%

6.48%

ROE

12.34%

12.16%

ROIC

5.74%

8.90%

These results imply EPS growth of 14.3%. While the ROIC and ROA numbers are still down from last year, it should be noted that the ROIC ratio takes into account the debt the company took on to acquire Fresh Frozen and the ROA number takes into account the assets acquired in the acquisition. However, the company received no income benefit from Fresh Frozen due to the timing of the acquisition. Therefore, Inventure's return on invested capital and assets should greatly expand in 2014. I believe Inventure's overall returns will be boosted next year as its acquisitions positively affect earnings and its healthy/natural brands continue to expand.

Peer Comparison

Look at trailing twelve-month numbers compiled from the Bloomberg Terminal and Hain and Inventure's SEC filings, we see that Inventure is not as cost efficient as its competitors the North American Manufactured Foods Group (BINFDMFP) and Hain Celestial (NASDAQ:HAIN).

BINFDMFP

HAIN

SNAK

Gross margin

21.84%

26.45%

17.75%

EBITDA margin

8.32%

10.93%

7.92%

Operating margin

6.05%

10.20%

5.18%

Profit margin

3.72%

6.40%

3.05%

At the same time, Inventure is actually trading at a higher multiple than its peer group on a variety of metrics.

BINFDMFP

HAIN

SNAK

P/E

24.37

32.01

30.67

P/CF

13.98

23.73

94.11

P/S

0.83

2.05

0.94

PEG

N/A

1.70

1.18

P/EBITDA

10

18.73

11.82

P/BV

2.75

9.19

5.78

EV/S

1.07

0.38

1.21

EV/EBITDA

12.86

3.51

15.26

Inventure's higher multiple (not higher than Hain), results from its extremely strong revenue growth. Over the last three years Inventure has grown revenues at an average rate of 17.1% versus its peer group's 7.5% rate. Its position in the healthy/natural space has allowed it to increase its top line at a much faster rate than its peers, entitling them to a higher multiple. While Hain has historically grown at an even faster rate than Inventure, excluding acquisitions, Inventure actually grew at a rate of 11% last year while Hain grew in the high single digits (Hain Q4 Earnings Call). I believe this result is indicative of the fact that Inventure has positioned itself in many of the hottest sub-trends in this category.

Moving forward, Inventure's small size ($217M market cap vs. Hain's of $4.5B or Kellogg's $23.8B) will allow it to sell products in smaller sub categories that its larger competitors cannot enter. For example, the company's Boulder Canyon brand has been an extremely important component of the company's revenues and growth over the last several years. The brand had sales of about $40M last year, which would equate to about 2% of Hain's sales for the year and less than 0.3% of Kellogg's. Therefore, the brand can substantially drive results for Inventure but would not be a meaningful part of the other companies. The healthy/natural segment is still a small category overall and composed of many niches. Therefore, many of the large consumer packaged goods companies cannot enter the category, even though it is growing at an extremely fast rate.

Even within this category though, many of the individual niches are too small for even companies like Hain Celestial to compete in. Comparatively, Inventure is substantially smaller than these companies and its size gives it an advantage against these competitors because it can profitably enter even the smallest subcategories of the healthy/natural space, thus capitalizing on growth areas that most others cannot. The ability to enter small niches of the market, along with its current product mix leads me to believe that Inventure will be able to grow substantially faster than competitors and therefore should trade at a higher multiple than Hain.

Below are my projections for Inventure's EPS and share price assuming it maintains its current multiple. My projections come from my DCF, which incorporates the opinions I have discussed above and assumes no share dilution. The projected share price derived from my model is $20.30. For the growth and margin assumptions please see below. I have included what these figures were in 2013 for comparison purposes Capital expenditures are held constant at $10M per year. In the interest of brevity I have left out the net working capital calculations but can provide them upon request.

2014

2015

2016

2017

2018

Projected EPS

$0.57

$0.75

$0.97

$1.18

$1.33

Share price

$17.43

$22.87

$29.79

$36.17

$40.73

Segment Growth Projections
2013201420152016201720182019
Frozen
Frozen Fruit25.13%10.00%10.00%9.00%8.00%7.00%6.00%
Frozen VegetableN/A(Full yr)*10%10.00%9.00%8.00%7.00%6.00%
Frozen Beverage1.00%4.00%5.00%5.00%4.00%3.00%2.00%
Snack
Boulder Canyon25.13%10.00%10.00%9.00%8.00%7.00%6.00%
T.G.I. Friday's-16.18%1.00%5.00%7.00%6.00%5.00%5.00%
Indulgent brands23.90%6.00%6.00%5.00%4.00%3.00%2.00%
Margin Expectations
Frozen19.40%19.50%20.00%21.00%21.50%21.75%21.75%
Snack16.40%16.40%17.40%18.40%18.90%19.15%19.15%

In summary, I feel investors misunderstand Inventure's earnings growth prospects due to the dilutive nature of the company's acquisitions in 2013. Inventure will substantially benefit from these acquisitions and from its strong product mix. I therefore believe that Inventure's current share price represents an attractive entry point for investors.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.