Seneca Foods Corp (SENEA) (SENEB) produces and distributes processed fresh produce including but not limited to bottled products, canned fruits, vegetables, frozen vegetables and other food products. The company sells its products under the Seneca, Libby’s, Aunt Nellie’s Farm Kitchen, Stokely’s, Read, Taste of the West, Cimarron, Tendersweet, Blue Boy, Festa, and Seneca Farms brand names. The company also distributes select Green Giant frozen vegetables for General Mills, Inc. (GIS). Seneca was established in 1949, has a current market capitalization of $335 million and an average daily volume of 26,000 shares.
Seneca Foods Corp (SENEA) (SENEB), at first glance appears undervalued. In particular, the company is currently trading below its book-value-per-share and on a price-to-sales basis, the company is trading at a ratio of 0.3, well below the industry average, which is closer to 1.5. However, Seneca’s operations, revenue and income can be highly volatile due to the seasonal nature of food production and volatile food prices. For example, weaker selling prices for the company’s canned products caused third-quarter income to collapse a staggering 52%, despite a 6% increase in revenue. Rising revenues and collapsing income is not usually indicative of a stable long-term investment.
Still, food is one of the most defensive industries around and Seneca Foods Corp (SENEA) (SENEB)’s long-term agreements with companies including General Mills, Inc. (GIS), and the company’s six decades of operations history show that the company knows how to navigate the peaks and troughs of the volatile produce industry.Nevertheless, it would be wise for investors to have a view on the general outlook of both the produce and farming industry before considering a position in Seneca; not an area where I can claim to be an expert.
Seneca Foods is set to benefit during the next few yearsOn the other hand, it would appear that Seneca Foods Corp (SENEA) (SENEB) is set to benefit during the next few years from the bankruptcy of peer Allens Inc, an Arkansas-based canned vegetable company that filed for bankruptcy protection in October. Like Seneca, Allens sells produce, mainly vegetables under the Allens, Princella, Freshlike and Royal Prince labels. Allens had been trying to restructure itself for some time, selling off non-core assets, mainly its frozen vegetable operations in favor of tinned produce. However, as consumers moved away from tins and toward frozen food the company suffered. Fortunately, this may provide Seneca with a valuable opportunity for growth in a low growth industry. Seneca is proposing to acquire Allens for a purchase price of about $148 million, subject to working capital adjustment and the assumption of certain liabilities. Unfortunately, it would appear that if Seneca goes ahead with this deal, the company’s debt-to-equity ratio will increase dramatically; it already stands at 87%.
Outlook for Seneca Foods is cloudySo all in all, the outlook for Seneca Foods Corp (SENEA) (SENEB) is cloudy but the company should benefit from the acquisition of its bankrupt peer. Although, it remains to be seen if the company can return to the level of profitability reported during 2012, which would justify a higher valuation. Without more earnings clarity, it is likely that the market will continue to place a low valuation in the company.
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