A bargain stock for value investors

High Liner Foods’ growth is slowing and its shares have been driven down into bargain stocks territory. Still, it should continue to earn and pay more. That’s why the shares remain a buy for value investors seeking price recovery plus high and rising dividends.

We regularly review Lunenburg, Nova Scotia-based High Liner Foods (TSX─HLF) in The Investment Reporter. Since we published our June 26 issue, its shares have plunged by about 40 per cent. That was the worst performance of the 10 food stocks we regularly follow.

This may reflect limited growth prospects. For several years, High Liner made a number of large acquisitions. This fueled its earnings per share growth. High Liner last made an acquisition on October 7, 2014—over a year ago. But as the company is already big, this $17.9 million purchase can add only a little to its sales. With a lower rate of earnings growth, the shares have moved lower.

But these shares have been driven down too much—right into the bargain basement stocks section. So we still rate them a buy for a long-term share price recovery plus high and rising dividends. Bargain hunting value investors should find value here.

High Liner writes that it’s “the leading North American processor and marketer of value-added frozen seafood.” It sells its products across the United States, Canada, and Mexico. The company makes its sales to grocery stores, club stores, restaurants and institutions (like hospitals). It also writes that it “is the major supplier of private label value-added seafood products to North American food retailers and foodservice distributors.” You’ve seen some its brands, which include High Liner, Fisher Boy, Mirabel, Sea Cuisine, C. Wirthy, Icelandic Seafood, Samband of Iceland, Viking, FPI and American Pride Seafood.

In the 26 weeks to July 4, High Liner earned adjusted net income of $20.3 million, or 65 cents a share (all figures in U.S. dollars unless preceded by a C). This was down by 4.4 per cent from adjusted net income of $21.3 million, or 68 cents a share, a year earlier. This largely reflected the high U.S. dollar.

The high U.S. dollar hurts its results

In the first half, High Liner’s sales in domestic currency inched up by 2.9 per cent, to $569 million. But the foreign exchange impact was to reduce its first-half sales by $32.1 million. This was up by 121 per cent from last year’s foreign exchange impact of $14.5 million. As a result, the company’s reported sales slipped by 0.3 per cent, to $537 million.

In the first half, High Liner’s sales in Canada came to $135 million. This was just over a quarter of total first-half sales of $536 million. The rest of the sales are earned in U.S. dollars. High Liner’s Canadian assets totaled $145 million. This represented a smaller 21 per cent of total assets of $693 million.

President and chief executive officer Keith Decker expects High Liner to do better in the second half of the year. He said, “With an improvement in sales trends towards the end of the second quarter, we will continue to focus on increasing volume in the remainder of 2015. Volume improvements will help to achieve the benefits related to our supply chain optimization initiatives and improve earnings. These efforts will be further assisted to the extent we realize expected lower seafood raw material prices.”

In 2015, High Liner is expected to earn C$2.15 a share, for modest earnings per share growth of 5.9 per cent, from C$2.03 a share last year. More important, the shares look well valued. Based on this year’s estimate, they trade at an appealingly-low forward price-to-earnings ratio of only 6.1 times.

Yardsticks show that it’s a bargain stock for value investors

In 2016, High Liner’s earnings per shares are expected to jump by 17.7 per cent, to C$2.53 a share. Based on this estimate, they trade at an even better forward price-to-earnings ratio of just 5.2 times.

High Liner’s price-to-cash-flow ratio is 4.2 times. This is within the range of five times or less that we seek. And its cash flow exceeds its needs.

High Liner now pays dividends of 48 Canadian cents a share. That works out to an attractive yield of 3.6 per cent. This dividend looks safe. For one thing, the growing earnings significantly exceed the dividend. For another, the company has raised its dividend for many years in a row. That is, it’s what’s known as a dividend aristocrat. High Liner will want to remain part of the dividend nobility.

 

The Investment Reporter, MPL Communications Inc.
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