In 2008, a year in which even the best of companies had a tough time staying afloat, the private-label food sector actually grew by 10% to a record $74 billion.
I believe the best opportunity for investors in this sector is Overhill Farms (OFI).
Overhill makes prepared frozen foods — entrees, plated meals, bulk-packed meal components, pastas, soups, sauces, poultry, meat and fish specialties and organic and vegetarian offerings — for branded retail, private label, foodservice and airline customers.
Growing Profits Even in a Recession
Although earnings were down from 2008’s second quarter, OFI still managed to post $51.6 million in sales, with net income $1.8 million (11 cents per basic and diluted share) for the second quarter ending March 29, 2009.
Earnings results were pressured by weakness in the airline industry (fewer passengers mean fewer meals), as well as a previously announced decline in orders from retail client H.J. Heinz, which is bringing more of its manufacturing back in house. However, food service net revenues helped profitability, with sales increasing 13.1%, to $12.1 million, as a result of taking on a new customer and increasing volume for an existing customer.
Even better news, the company’s Chairman and CEO, James Rudis, noted that beginning in March, OFI has seen “substantial upturns in our volumes and revenues.” This positive development led to a decision to use some of its cash to make a voluntary debt reduction, decreasing its $20.6 million loan by $5 million later this month. That will leave it with about $5 million in cash, as well as a $7.5 million line of credit, both available for working capital or expansion.
Overall, I’m pleased with the progress the company is making, and I applaud its decision to buy down its debt. If management didn’t feel confident in the near-term future, it wouldn’t allocate its cash for that purpose.
Overhill Farms is our kind of buried treasure. It has all of the characteristics of a financially sound, mega-growth company. The company is beating the pants off its competition in terms of sales and earnings growth, margins and return on assets and equity.
I believe it has the potential to not just double but possibly more than triple. Buy OFI when you can get it under $3.50.
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