Analysis: High Liner Foods (HLF.TO)

High Liner Foods holds a special place in my investing heart, because it was the first stock that I ever performed my own analysis on. Since purchasing it in 2010, it has soared over 50%, making it an incredibly valuable part of my portfolio. High Liner’s success is what really pushed me into the value investing sector, whereas before I was always trying to time the markets as a day/swing trader. High Liner’s share price growth has been impressive, showing an 8.57% compound annual rate of return from 2002-2011.

High Liner Foods Share Price Growth, 2002-2011

Fast forward two years, and things are even better. On September 20, 2012, High Liner Foods announced that they had been added to the S&P/TSX Small Cap Index, which was a major accomplishment. This addition brought about added exposure and liquidity to the stock as it is now traded in some of the S&P/TSX Small Cap ETFs such as iShares XCS.

Given all of these changes, I felt that High Liner warranted a refresh of my initial analysis. While I discussed my initial evaluation methodology previously, reviewing my original analysis reminded me of some of the fundamentals I should be looking for. That said, I’ll be expanding my initial evaluation methodology, starting with High liner. So, what do we have at first glance?

Criteria Value Threshold Pass?
Strong financial condition Current Ratio 2.05 1.50 YES
Earnings Stability Positive EPS over last 3 years 8.00 3.00 YES
Earnings Stability Less than 2 consecutive negative years 0 2 YES
Dividend Growth Dividend Growth 30.75%
(from 2003-2009)
2.00% YES
Share Price Growth Minimum 3.00% compound growth over the past 10 years 9.82% 3.00% YES
Moderate P/E Ratio P/E 8.61 15.00 YES
Moderate P/BV Ratio P/BV 1.09 1.50
Moderate P/E*P/BV Ratio P/E * P/BV 9.38 22.50

In the above, the one that needs a real explanation is the P/E, P/BV, and P/E×P/BV section. I consider a firm to be overpriced if its P/E is greater than 15, its P/BV is greater than 1.5, or if the combined value of both is greater than 22.5. This combination factor allows for some flexibility.

If the above looks familiar, it probably is. For the most part, this is a screen taken from Benjamin Graham’s The Intelligent Investor. The above values are based on the 2009 fiscal year, which is the data I originally used for selecting the stock. However, looking at 2011 data, we have a drastically different story:

Criteria Value Threshold Pass?
Strong financial condition Current Ratio 1.31 1.50 NO
Earnings Stability Positive EPS over last 3 years 10.00 3.00 YES
Earnings Stability Less than 2 consecutive negative years 0 2 YES
Dividend Growth Dividend Growth 28.03 2.00% YES
Share Price Growth Minimum 3.00% compound growth over the past 10 years 5.37% 3.00% YES
Moderate P/E Ratio P/E 13.59 15.00 YES
Moderate P/BV Ratio P/BV 1.53 1.50
Moderate P/E*P/BV Ratio P/E * P/BV 20.78 22.50

While all of the initial tests passed, the price of HLF.TO is now incredibly high; the 2011 chart is based off of a $16.35 share price, but the stock is now trading at $23.94, which yields a P/E of 19.90, P/BV of 2.24, and P/E×P/BV of 44.55! (This is assuming we use the EPS of the fiscal year, with the October 1, 2012 share price). The stock would definitely not be on my radar at the moment because it is incredibly overpriced.

Initial screen aside, the other fundamentals look solid.

HLF.TO Dividends and Dividend Payout Ratio

EPS vs. Dividend Payout Ratio

Observing the above, there has been consistent growth in the dividend over the past five years, and the dividend payout ratio has — except for 2005 — remained consistently below 50%. In adition to this, EPS has been inching slowly upwards since 2005. One may be a little wary of the huge EPS in 2003 which suddenly dropped by 2004, but the 2003 blip was a one time event “realized on [High Liner’s] exit from the harvesting and primary processing businesses,” as discussed in the 2003 annual statement.

ROE, P/E and FCF all show simila rpositive trends, once one ignores the 2003 event:

High Liner Foods ROE 2002-2011

High Liner Foods P/E Ratio, 2002-2011

High Liner Foods Free Cash Flow per Share, 2002-2011

While FCF has been a little week, overall High Liner has been a solid performer. Good management has seen the company shedding businesses that it no longer needs (such as food processing in 2003 and the Italian Village line in 2005), and making good acquisitions such as their purchase of Icelandic Group in 2011. All in all, the firm has strong fundamentals, a good management team which is focused on increasing the value of the business, and a solid (but well managed) history of increasing dividends.

Depending on what the fiscal 2012 results are, I would consider picking up HLF.TO on dips in 2013, provided the combined P/E×P/BV ratio was less than 25 (higher than my regular threshold, but I woudl be willing to give a little on an excellent company).

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