Wow what an article, will see if fits here:
Innovative Food Holdings Trades At A Fraction Of Peers' Valuations With A Superior Business Model And Strong Growth Trends
Jul. 1, 2015 8:00 AM ET | 3 comments | About: Innovative Food Holdings, Inc. (IVFH)
Disclosure: I am/we are long IVFH. (More...)
Summary
Last year, Innovative Food Holdings acquired The Fresh Diet at a bargain 0.6x sales, in an industry where comps can trade at 5-10x sales.
The Fresh Diet has considerable competitive advantages, is highly synergistic to Innovative Food Holdings's current business line, and has significant growth opportunity with multiple industry tailwinds.
Innovative Food Holdings's core Specialty Foodservice division is also an impressive, large moat, scalable enterprise with historically-proven growth potential.
The company's current valuation of 1x forward sales is significantly detached from the valuations in its current industry and leads to multi-bagger upside potential.
Innovative Food Holdings (OTCQB:IVFH) is a small $25 million market cap company making a big splash in a huge market. There are two divisions to the company: their Specialty Foodservice division, and The Fresh Diet (TFD), which they acquired about 9 months ago.
The Fresh Diet
First, we'll go over TFD's business. TFD delivers food to consumers' doorsteps. One simply signs up for the delivery service on TFD's website, then picks out their meal choices (or lets the chefs surprise them), and voila! they're set with 3 meals and two snacks a day delivered right to their doorstep in the mornings for the days that they've selected for their program. As the name implies, TFD is both fresh, utilizing natural and unfrozen ingredients, and diet, with healthy, fresh ingredients and set meals structures catered to those that wish to lose weight or maintain a healthy diet.
TFD's industry is very hot right now, in the eyes of investors and consumers alike. This is shown by companies such as GrubHub (NYSE:GRUB), Blue Apron (private, VC backed), and Munchery (private, VC backed). GrubHub is currently trading at 10x sales and nearly doubling its top line YoY. Blue Apron, which delivers ingredients and recipes to consumers to allow them to cook their own meals, is valued at $2 billion, or 5.5x annualized monthly sales, based on a recent round of funding. Munchery, which delivers microwavable frozen meals to consumers, was recently valued in a round of funding at $300 million, based on an unknown amount in sales. This food delivery space is hugely popular among VCs and other investors, and has allowed even small startups to garner multi-hundred million dollar valuations. Yet almost all investors seem to be ignoring the petite $25 million public company that is right in the middle of this space.
TFD's business is also supported by another macro industry trend: the desire for fresh, healthy food. The gradual deterioration of companies such as McDonald's (NYSE:MCD) and the rise of companies like Chipotle (NYSE:CMG) show this trend in action. Consumers are no longer willing to tolerate greasy and unhealthy fast food, and are slowly migrating towards healthier alternatives on the market. TFD fits into this trend perfectly, as more and more consumers take the health-conscious route and go for TFD's fresh and natural food. There is also a macro trend towards dieting and its health benefits, which is the basis of TFD's business and will continuously attract customers to it. Online ordering and delivery services are also rapidly gaining interest from investors and consumers alike, shown by the rise of companies like Amazon (NASDAQ:AMZN), and other online delivery services. In the food sector specifically, multiple food delivery services now exist, although few match up to the prowess of TFD.
TFD separates itself from its competition in that, instead of giving consumers frozen meals to heat up, or forcing them to cook it themselves, they actually make the meals completely for consumers, and deliver it right to their doorsteps. This is significantly better service than their competition, as it completely ensures that consumers need not exert any unneeded effort in order to get and eat their food. More importantly, TFD has a very strong delivery network and complex logistics network. Below is a map of the company's five distribution centers, and the areas that they can deliver to.
(click to enlarge)
As you can see, TFD has a foothold in almost every single populated metropolitan area. This is in contrast with most foodtech startups, who mainly only focus on one place like New York, which will eventually cause them branding weaknesses when trying to expand geographically. Alternatively, one can also see the vast amount of gray on this map as future geographical growth potential for TFD. Also, TFD already has a complex logistics network in place, involving dozens of employees and an uncanny amount of accuracy. In fact, as per a recent company presentation, TFD has a 99.98% meal accuracy rate and a 99.8% delivery accuracy rate. These numbers are only achievable with the sort of complex logistics network that TFD has, made possible by the company's proprietary technology platform (also mentioned in the presentation). This proprietary technology platform is a strong barrier to entry into TFD's market, as it took TFD years to build up their network, and would likely take another startup the same amount of time and effort. Also, TFD's production and distribution facilities are unmatched in the industry, as most companies do not completely prepare meals for customers, and the ones that do rarely do so with the same amount of freshness and delivery expertise.
The Acquisition
All of this and Innovative Food Holdings must have had to purchase TFD at an aggressive valuation multiple, perhaps the same as those of the aforementioned food delivery companies? Not at all. At the time of the purchase (August 2014), TFD had generated trailing annual sales of $24 million. Innovative Food Holdings's purchase price? $14 million completely made up of 10 million in stock at $1.40 a share. So it follows to ask, how did Innovative Food Holdings purchase a company in one of the hottest industries on the market with a superior business model for 0.6x sales?
The answer is quite simple: TFD at the time was an unprofitable business run by a CEO who had no experience in operating a foodtech business: Raj Rawal. 13 months prior to the acquisition TFD's founder, Zalmi Duchman, switched up the management team and Raj Rawal became CEO. As Rawal had little experience in this kind of business, Innovative Food Holdings could therefore take advantage of his inexperience and TFD's lack of profitability and financing to offer a bargain price for TFD.
Specifically looking into TFD's lack of financing, investors could find it surprising that no VCs or other investors had invested into TFD prior to the acquisition. This was because the only investor in TFD at the time, Monolith Ventures, was also tied to penny stock fraud, therefore making VCs and other investors skeptical of the company. Also, as the only investor in TFD at the time, they had powerful rights at the company in that they had right of consent to the company's transactions, thus allowing them to dismiss any further investment from other parties. They even sued the Innovative Food Holdings and TFD after the acquisition, stating that TFD did not have the right to sell the company without their consent. Needless to say, they lost the suit and can no longer affect Innovative Food Holdings like they did TFD. (The founder of Innovative Food Holdings, Zalmi Duchman, provided the last two paragraph's information after my article was initially published, as I had made incorrect statements about management and the lack of prior investors in TFD before. They are now corrected.)
Innovative Food Holdings was quick to revitalize and strengthen TFD once they acquired it. First, they appointed Bryan Janeczko, who founded NuKitchen and eventually sold it to Nutrisystem (NASDAQ:NTRI), as TFD's CEO. Other key management positions at TFD were also shifted around, leading to a stronger and better-managed enterprise. They also partnered with Ogilvy & Mather, one of the largest marketing companies in the world. This partnership is significant, as management stated in a recent presentation that every $1 spent on TFD advertising yields $4 in sales. Partnering with a huge marketing corporation like Ogilvy & Mather simply allows them to realize more sales potential via ads.
The Specialty Foodservice Division
However, TFD is only 1/2 of Innovative Food Holdings's current business. Innovative Food Holdings had a whole other business before they bought TFD that was arguably just as good as TFD's. The other half of Innovative Food Holdings's is comprised of various subsidiaries that largely contribute to doing one thing: delivering perishable and gourmet foods and ingredients to customers nationwide. These customers include restaurants, chefs, and other food distributors that require high quality, gourmet food. This Specialty Foodservice division's focus is on providing food distributors with ingredients and foods that they would otherwise not be able to healthily store for a prolonged period of time, or simply do not have the access to, due to geographical, economic, or other concerns. The company sells all around the country, but has a special interest in Chicago, where they own a regional supplier called Artisan Specialty Foods. Artisan supplies 500 customers in the highly populated Chicago areas, and has a strong foothold in that market.
The brilliant part of this business is the extreme lack of competition in the industry. Innovative Food Holdings is one of the only nationwide distributors of food and ingredients, and competes mainly only with much smaller local suppliers, giving Innovative Food Holdings a major edge in terms of size and scale. Furthermore, as with TFD, Innovative Food Holdings's Specialty Foodservice division has an extremely complex and structured logistics plan in place, involving proprietary technology from the company. This ensures that the Specialty Foodservice division's business model would be extremely hard to replicate and scale, and that, for anyone trying to enter the market, it would be more profitable to buy Innovative Food Holdings's already set up business than to try to start another one from scratch. This logistics plan also allows the company to effectively and efficiently handle all of their orders with same-day or overnight delivery of fresh, perishable products. This is a feat not matched by the company's competition.
Furthermore, this business has delivered 6 consistent years of YoY revenue and EBITDA growth, an impressive feat. Even more impressive is the 22% revenue CAGR the business has achieved (note that this is inclusive of the Artisan acquisition, which contributed ~$5.5 million in annual revenues). The EBITDA CAGR is technically infinity, as they were unprofitable 6 years ago. This is a very impressive growth rate that I think will continue well into the company's future as they continue to execute on their business strategy.
The only downfall to this Specialty Foodservice business is that Innovative Food Holdings has only a small distribution network of its own to deliver the foods. Instead, the company has historically delivered the vast majority (>70%) of the specialty food division's sales through US Foods (private). This is a significant negative trait of the company as it both introduces a middleman to Innovative Food Holdings's business, and presents a risk of sales concentration to one customer (although this is not as important, considering the two companies have been partners for years, and they also recently signed a new Vendor Agreement until the end of 2016).
Synergies
I believe that this issue will begin to slowly resolve itself as the company continues to integrate the TFD acquisition. The beauty of this acquisition are the multiple synergies between the two companies. TFD and Innovative Food Holdings's Specialty Foodservice division complement each other perfectly. TFD needed a stronger and more experienced management, profitability, access to more financial resources, and a wider selection of food, all of which Innovative Food Holdings could provide it with. Innovative Food Holdings, at the time, needed a "last mile" delivery plan, to circumvent US Foods. TFD, with its strong last mile logistics plan already in place, could give Innovative Food Holdings exactly what it wanted... for 0.6x sales.
Furthermore, TFD now has Innovative Food Holdings's national reach, and the two companies combined now have significant purchasing power and can demand lower prices from suppliers. The acquisition also significantly helped in vertically integrating Innovative Food Holdings's business by adding TFD's last mile delivery network to Innovative Food Holdings's business, and Innovative Food Holdings's supply network to TFD's business. Therefore, the acquisition significantly helped both parties involved, and ensured that the resulting enterprise would be stronger than it was before.
Valuation
None of these positive traits, however, are reflected in Innovative Food Holdings's current valuation. The company made $11 million in revenues last quarter, which has historically been the Specialty Foodservice division's seasonally weakest quarter. TFD did not issue quarterly earnings reports prior to the acquisition, and so it's unknown how much seasonality affects their earnings, although the company does operate on a subscription-based business model, so we can reasonably assume that there is only marginal seasonality to their business.
Also, the Specialty Foodservice division has historically seen strong YoY growth; as is shown by the below numbers, the division has historically grown at ~16% YoY, only missing that growth rate 2 out of the past 8 quarters.
Quarter % growth yoy Revenues (millions)
Q1 2015 18.18% 6.5
Q4 2014 19.30% 6.8
Q3 2014 15.00% 6.9
Q2 2014 14.29% 6.4
Q1 2014 5.77% 5.5
Q4 2013 -5.00% 5.7
Q3 2013 17.65% 6
Q2 2013 30.23% 5.6
Q1 2013 62.50% 5.2
Q4 2012 6
Q3 2012 5.1
Q2 2012 4.3
Q1 2012 3.2
*Note that these numbers are only for the Specialty Foodservice division and do not include earnings from TFD.
Factoring in a conservative 10% growth rate YoY, we can estimate Q2, Q3, and Q4 earnings of $7 million, $7.6 million, and $7.5 million, respectively. Note that these numbers are conservative, given that they both assume a historically weaker growth rate, and ignore possible last mile synergies from TFD being realized during the year. Added up with the already-realized $6.5 million, this equates to $28.6 million in revenues for this year just from the Specialty Foodservice division.
TFD's revenues are not as easily calculated. Management, since acquiring the company, has focused mainly on returning TFD to profitability, before achieving organic growth with the company. Because of this, and because past financial results from TFD are not publicly available, we can't assume a revenue growth rate for TFD the same as we can for the Specialty Foodservice division. Utilizing the numbers we do have, we can see that TFD earned $3.1 million in Q4 2014 and $4.6 million in Q1 2015 in revenues. Investors may now be wondering why these numbers, annualized to equal $15.6 million, are so much lower than the reported $24 million in TFD's revenues for the year prior to the acquisition. This is due to a multitude of non-cash, acquisition-related GAAP accounting adjustments, mainly amortization charges, and one-time, acquisition-related charges such as legal fees. Adding back these charges into the reported revenues, TFD actually earned about $5 million in both quarters, significantly higher than the reported results. Granted, annualized, these numbers are still 15% below the $24 million TFD earned last year, but I would rather take a profitable company generating $20 million a year than an unprofitable one earning $24 million a year.
Given these numbers, I believe it's safe to simply annualize the two quarters' results to arrive at a projected $20 million in revenues this year, especially given TFD's subscription-based business model that allows for relatively sustainable earnings. Furthermore, in a recent investor presentation, management stated that 70% of their customers are repeat customers, with an average stay time of 92 delivery days each. This means that, in order to sustain current earnings, TFD only has to replace on average one of their customers every quarter.
Using the projected numbers for TFD and the Specialty Foodservice division, I estimate Innovative Food Holdings can do $48.6 million in sales this year.
Innovative Food Holdings's current market cap is ~$27 million; however, this is ignoring many outstanding warrants, convertible notes, and options that the company has. The company's fully diluted market cap is actually ~$45 million currently.
Using this $45 million market cap, Innovative Food Holdings is currently trading at less than 1x its forward $48.6 million in sales. This is a ridiculous valuation, especially given Innovative Food Holdings's numerous aforementioned positive traits.
Another way to look at this is seeing Innovative Food Holdings as a two separate companies and valuing it like so. The Specialty Foodservice division, because it is profitable, can be valued on an earnings basis. The Specialty Foodservice division earned $2.8 million in EBITDA last year (factoring out one-time or non-cash charges). This represented a 40% increase over last year's EBITDA. In the past few years, the division has sustained even higher growth rates; even backing out earnings from the Artisan acquisition in 2012, Innovative Food Holdings still achieved a ~70% EBITDA growth rate YoY in 2013, after 120% EBITDA growth YoY in 2012. With EBITDA of $2.8 million last year, Innovative Food Holdings currently trades at ~16x fully diluted EV/EBITDA (ignoring TFD completely).
Some public peers in the specialty food industry include The Chefs' Warehouse (NASDAQ:CHEF), and United Natural Foods (NASDAQ:UNFI). The former trades at 18x trailing EV/EBITDA with ~20% annual top-line growth and virtually no EBITDA or net income growth whatsoever. The latter trades at 12x trailing EV/EBITDA with ~15% annual EBITDA growth rate. Seeing as Innovative Food Holdings's Specialty Foodservice division's EBITDA growth rate surpasses that of both competitors', one could make a fairly strong argument for a premium valuation. However, at just 16x EBITDA, any premium valuation would make just the Specialty Foodservice division worth more than the entire company.
And you already know the TFD story: comps trade at 5-10x sales, and startups garner multi-hundred million dollar valuations, while TFD gets bought at 0.6x sales and the stock is down from the time of the acquisition. Factoring all of this in, it's probably safe to say that Innovative Food Holdings is quite undervalued.
Catalysts/Upside Potential
There will be easy upside once Innovative Food Holdings becomes profitable again by returning TFD to profitability. Management has stated that they expect a return to profitability by end year, yet the market is currently valuing the company as if it will not happen anytime soon. Management's guidance has historically been fairly accurate, and I expect their prediction about a return to profitability will turn out to be true. If it is, it could act as an upside catalyst for the company's stock, as investors are currently misinterpreting negative net income from the company as a long-term problem instead of a transition period for integrating a new acquisition.
Furthermore, Innovative Food Holdings is still a very small company; with a market cap of just $25 million and only ~$30,000 worth of stock traded daily, the company is just in its first innings of development. I believe that, as the company grows larger, it will be able to attract a larger audience such as institutions, analysts, and the general retail crowd. Right now, the company has a grand total of one institutional holder that owns <0.5% of the company. I believe that this will change as the company grows larger and large institutions, such as hedge funds, are able to buy meaningful amounts of the company. I also believe that, once this company gets onto mainstream media, analysts will be scrambling to initiate IVFH as a buy, and retail will be just as eager to follow the recommendation.
Also, Innovative Food Holdings is, as the name would suggest, a holdings company. Over the years, Innovative Food Holdings has made numerous acquisitions at both attractive prices and with highly synergistic businesses. Innovative Food Holdings purchased a majority of their current businesses. Artisan, The Haley Group, Organic Food Brokers, and TFD are all companies that Innovative Food Holdings has purchased. Also, all of these acquisitions have occurred after 2012, showing that management is finally picking up and aggressively pursuing growth. Furthermore, these acquisitions were also highly synergistic and relatively cheap as well: Artisan, bought at 4x EBITDA and 0.25x sales ($1.2 million up front plus $0.3 million in financial milestone payments), had previously been a supplier to the company, thereby allowing for vertical integration through the acquisition, and now serves as a nationwide fulfillment center for the company; The Haley Group, bought for just $0.1 million, brought on board the company's founder, Lou Haley, an extremely experienced and skilled Foodtech executive and has the potential to be of significant value in the future (see next paragraph); Organic Food Brokers, bought for $0.625 million (which factors in financial milestone payments) at ~1.1x sales, is now an integral part of their business and also has the potential to be valued very highly in the future (see next paragraph); and the TFD story we all now know. The major two acquisitions during this time, Artisan and TFD, were both purchased at significantly below the 1x sales multiple the company currently trades at, and the 16x Specialty Foodservice division's EBITDA multiple. The company currently has a reasonable $3.1 million in cash to finance an acquisition with. I believe that Innovative Food Holdings can continue to execute on their acquisitions by identifying and buying quality companies for cheap, then integrating the companies into their own business. A future acquisition could also act as a potential catalyst for the company's stock.
Innovative Food Holdings also has another division of business that is very interesting. It's called the 'new product launch' division, and is made up of three businesses: The Haley Group, Organic Food Brokers, and Food Hatch. This is basically the company's investment arm, which looks at different small food startups and considers investing into them. They also offer advisory services to the companies if they think there's potential. So far, this division has not made any investments into any companies, but there is significant potential in this investment arm, especially as it resembles a sort of VC investment firm, just not obligated to find investments in a set time frame. I believe that Innovative Food Holdings's management has significant investment acumen, especially considering that management comes from a corporate law firm background. I believe this investment acumen will eventually transfer to impressive results from this new product launch division, especially if true VC-like returns are realized.
Lastly, Innovative Food Holdings is also extremely scalable with significant organic growth potential. The aforementioned investor presentation states that their Specialty Foodservice division can "efficiently handle 5-10x more volume at little incremental cost". They also estimate that TFD can handle 60% additional volume at little incremental cost.
Risks
A major negative to the company is that a lot of their growth is fueled by dilution; over the years many acquisitions have been financed by stock, options, convertible notes, or warrants. Furthermore, over $20 million in dilutive securities have been built up over the years at the company, significant against their $25 million market cap. This negative is partially offset by management's investment ability; most of their acquired companies have been purchased at bargain prices, far below the current valuation of the company. Because of this, their acquisitions and other financings have proven to have a long-term positive effect on the company, even though they required shareholder dilution to happen. However, I would still prefer the company's growth to be fueled mainly by internal cash flows, not dilution.
Also, management's predictions about TFD's growth potential and return to profitability could also go wrong, thus erasing a significant portion of the investment thesis.
IVFH is also a very small stock with very little volume; set only limit orders and don't expect large (>$30,000) trades to go out completely at one time.
An economic downturn would also be of special adversity to the company, as their products sell at premium prices because of the service and quality. In economically adverse conditions, I believe that this will end up forcing many customers to avoid the expenses associated with their products.
Conclusion
Innovative Food Holdings is a small company in a big space with significant upside potential. The Fresh Diet is operating in a space where comps trade at 5-10x sales, and startups get valued at hundreds of millions. However, Innovative Food Holdings got a bargain price (0.6x sales) on the company because of its inexperienced management and lack of profitability and business visibility. Innovative Food Holdings immediately worked to turnaround The Fresh Diet, which has now become well-managed, with a return to profitability right around the corner. The company's complex logistics plan and production and distribution facilities serve as considerable competitive advantages and barriers to entry; it would take any potential competitor years of time and significant effort to build a similar enterprise. Also, there are multiple potential synergies between The Fresh Diet and Innovative Food Holdings's Specialty Foodservice division's business, allowing for considerable organic future growth potential.
I believe IVFH can potentially become a multi-bagger over the next few years, especially as a simple valuation expansion up to peers would yield >500% upside, which ignores organic growth from the company or any potential future acquisitions.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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