Where Food Comes From Inc. (WFCF)

[Cooperpee]

Ian Cassel's article on WFCF is a good read


http://seekingalpha.com/article/1707182-the-best-food-stock-you-never-heard-of?source=yahoo

Where Food Comes From (WFCF.PK) is the US leader in food auditing, verification, and traceability solutions in beef, pork, and poultry. The company's largest customers include Whole Foods Market (WFM), Chipotle Mexican Grill (CMG), Tyson Foods (TSN), Cargill, Sysco (SYY), Smithfield Foods (SFD), Hormel Foods (HRL), Perdue, and other well-known food companies. For example, Where Food Comes From audits and verifies a majority of the beef and pork supply sold into Whole Foods. Industry and food trends combined with political legislation will likely make the company's core audit and verification services mandatory over the next few years. Given Where Food Comes From's near monopoly status in the industry this could create the perfect storm for shareholders over the coming years.

Demand for Where Food Comes From's services have been driven from consumers wanting to know more about their food. Where Food Comes From's auditing and third party verification services verify that producers are producing to the standard they display on the label: Organic, Gluten-Free, Hormone Free, non-GMO, Grass-Fed, Humane Handling, Source & Age etc. The hard truth is that only a fraction of producers marketing claims are third party verified, and that is the opportunity. With food issues hitting the news outlets everyday like mad cow, pink slime, salmonella, animal welfare, and many more, consumers unfortunately don't trust food producers. All trends point to third party auditing and verification of the food supply, and Where Food Comes From is the market leader through its subsidiaries: IMI Global, ICS International, and recently acquired Validus.

Where Food Comes From isn't a VC funded startup, but a 18 year old company based out of Castle Rock, CO. Like a lot of microcap companies, WFCF went public way too soon, likely bamboozled by some shell guy or investment banker, which forced John Saunders (CEO) to bootstrap the operation and get it to profitability as quickly as possible. I'm most impressed with the fact that during the turn around the company didn't dilute shareholders and kept a tight share structure. The company has 21.5m shares outstanding, and the management and board own 11.5m. The company is profitable which limits the dilution risk that is inherent in most microcap growth stories. The company is small by revenue but huge by footprint and by the amount of food the company touches.

I expect the "small revenue" to change over the next few years as several major food trends, initiatives, and legislation push the companies services to the mainstream:

WFCF annually verifies marketing claims for more than 1 million head of cattle, or about half of all US beef exports. This seems like a big number, but currently only 5% of the beef produced in the United States is third party audited-verified to ensure marketing claims and food labels are accurate. WFCF is also the leader in source and age verification (USVerified certification) in the beef industry, which in most cases is mandatory for exportation markets. The company currently works with 6,000 beef producers out of a total 800,000 beef producers that exist in the United States. Earlier this year, the Food & Disease Traceability Act was passed that stipulated that source-age verification become mandatory not only in beef but across all hooved animals for interstate commerce purposes. No hard dates were set in the Act, but it's thought that it would be phased in over a period of 3-5 years thus forcing all of the 800,000 beef producers to comply. Since WFCF owns this market, if/when just 10% of the beef market complies, this could increase the companies revenue by 13x based on current pricing.

Last week, Where Food Comes From acquired Validus Ventures which audits-verifies approximately 50% of the pork produced here in the United States in the areas of animal welfare. Food safety and animal welfare as it relates to pork has been a real hot button issue lately with Chinese meat processor Shuanghui International Holdings likely buying Smithfield Foods , the worlds largest pork producer. One of the reasons the Chinese want to make the acquisition is to not only directly source the best quality pork, but my guess is they also want to replicate Smithfield's food safety procedures across their domestic producers. Further tailwinds driving pork verification includes verification for Ractopamine-Free, Gestation Free, and other standards that are now just hitting the mainstream. This will be a big catalyst for WFCF.

A year ago Tyson Foods announced a new auditing program called FarmCheck to ensure humane treatment of animals across all of their 12,000+ livestock and poultry producers. With the acquisition of Validus, the only company that could do this is Where Food Comes From. This will likely be phased in over the next few years.

Whole Foods Market , which is already a big customer of WFCF, announced in March that they will require suppliers to be non-GMO compliant by 2018. Whole Foods cites that the US and Canada still don't have non-GMO labeling laws in place but they believe it is coming. To stay ahead of expected legislation the company is moving forward with its own GMO transparency plan. This is a large undertaking and Whole Foods will likely be relying heavily on WFCF.

Further Blue Sky: Where Food Comes From Food Labeling Initiative

Where Food Comes From now verifies over 50% of the verified beef, audits-verifies over 50% of all pork production, and a similar percentage of poultry produced in the US. Similarly to how a social network tries to figure out how to best monetize its millions of users, how can WFCF further monetize it's positioning? WFCF can take the information it collects on a daily basis and take it directly to the consumer with its own food label that allows the consumer to see exactly where their food comes from.

(click to enlarge)

The beauty of the food label is two fold. First, if a grocery store, restaurant, brand, or distributor wants the label they have to first have their producers be audited and verified effectively cross selling WFCF core business. Second, WFCF gets paid a Per Pound Royalty for everything the label is on, so this is an additional high margin recurring revenue stream to the company. The per pound royalty is varies based on whether its on beef, pork, poultry, lamb, etc. Over a year ago the company announced its first customer, a high-end regional grocery store chain, Heinen's Fine Foods. If you walk into one of Heinen's 18 stores today you will see the Where Food Comes From logo on all the beef and pork and soon to be other products. WFCF also launched the label in Delmonico's Steak House in New York City.

Labeling revenues to date have been small, but I believe it's only a matter of time until a major brand, grocery story, restaurant chain, or distributor announces the roll out of the WFCF labeling program. Also, the company verifies a bulk of exported beef, so international markets like Japan and EU are also low hanging fruit for the labeling program. Any mid-large tier labeling win would likely mean seven figure recurring, 90%+ margin revenues to WFCF. The company's goal is to really show true and verified source of origin on multiple food categories. A few VC backed companies claim to do this already, but it's not third party verified, it's more like an honor system. I think this could be a huge opportunity for the company over the next few years.

In conclusion, I believe Where Food Comes From is not only the most unique food safety, traceability, organic, gluten free, etc, type microcap that exists, but I think it's the most unique across all market cap classes. The great thing about Where Food Comes From is no one knows about it, and WFCF isn't owned by institutions yet. On any fundamental metric the stock isn't cheap, but these types of stories are never "cheap" and don't trade on hindsight trailing twelve months multiples but on scarcity value and potential of which WFCF has a high amount of both. The catalysts and tailwinds around the company are as big as any microcap I've seen, and the company is perfectly positioned. Another food safety microcap with a $10m revenue base, Park City Group (PCYG), has gone from $2.70 to $10 over the last year as institutions have started to pile into the name. I expect this same institutional type rally to occur in Where Food Comes From sometime over the next 18 months.