Looking at the Hanover Foods Corporation Annual Results for 2019

Hanover Foods is a classic Oddball that has been written about on this blog a number of times over the years: the original posts (parts 1 and 2) back in 2012, and an update in 2013, among other mentions.

Over the past year and a half we've been writing about Hanover Foods Corporation (HNFSA/HNFSB) pretty frequently in the Oddball Stocks Newsletter. Will anything ever change there? Will value ever be realized? Both of its classes of stock have been in a slump and are back to where they were in 2011-2012. (Of course they have each been paying a small dividend of about $1.10 annually along the way.)

The annual report for the year ending June 2, 2019 just arrived in the mail. The market capitalization is now about $60 million, compared with net current assets of $127 million and common shareholders' equity of $229 million.

The common shareholders' equity is now $320 per share. This is up from the $250 per share when the idea was first written about on Oddball Stocks. Even ignoring goodwill and intangible assets the book value would be $309 per share - almost four times the price of the nonvoting A shares.

However one of our concerns has been that the Hanover business seems to be deteriorating. For this fiscal year, gross profit was $31.8 million, down from $40.8 million the prior year - a decrease of 22 percent. Operating profit dropped from $7 million to only $354,000.

Looking at the cash flow statement, the company had $17 million of depreciation and amortization over the two most recent fiscal years, but spent $25.3 million on purchases of property, plant, and equipment. That $8 million dollar difference was paid for essentially by liquidation of inventory over the most recent fiscal year.

Why was Hanover's profitability so poor? We know from the report that frozen and canned vegetable sales were up a little bit, but snack sales were down from $51.6 million to $44.6 million. Perhaps this segment was higher margin. It seems to consist of snacks like pretzels and cheese balls.

The annual report mentions that last June the company impaired the full amount of the goodwill associated with its snack foods reporting unit. Hanover also "ceased operating its direct store delivery business," resulting in an additional impairment of $2.1 million of intangible assets. These noncash charges drove up administrative expense and so are responsible for a fair bit of the year-over-year decline in profitability.

Hanover's business just seems to be in steady long-term decline. Between 2000 and 2004 sales were lower than today but gross margin was much higher, resulting in some decent profits. Hanover's market capitalization probably wouldn't be $60 million if it were still earning $10 million like it did in 2003 and 2004.

From 2000-2004, Hanover earned an average net income of almost $9 million: higher absolute profits on revenues that were only three-quarters of the current levels. One wonders how much of the declining profit margin is secular business decline and how much (if any) is coming from excessive insider compensation or expenses being run through the business.

On the plus side, since the market capitalization is only 26% of its shareholder equity, the low return on equity transforms into a shareholder earnings yield almost four times higher. (Of course there is the risk that the current, low profitability levels will deteriorate further or become losses...)

We have seen in the past that “one-day” good events can happen for shareholders of companies where the market price is too dislocated from asset values. And we have also seen low returns on equity turn into respectable IRRs for shareholders who buy in at very big discounts to book value. And one other thing worth mentioning – Hanover was probably the most hated Oddball at our Newsletter meetup this year. There was only one gentleman willing to raise his hand to say he had not given up on it!

We have written about Hanover in a number of recent Issues of the Newsletter (back Issues are here) and will continue to do so going forward.

Vulcan International Corp. Timberlands Listed for Sale!

A fellow Oddball sent in a new development for Vulcan International, the previously mentioned (in 2015 and 2018) Oddball that announced plans to liquidate last year but has not announced any progress with the liquidation or paid any distributions.

One of the company's assets is 14k acres of land and timber in the UP of Michigan. This has been placed on the market, with bids due on October 11th:
THE OFFERING
American Forest Management, Inc. (AFM) has been retained to solicit sealed bids for 14,306± gross GIS acres of land and timber located in Houghton and Ontonagon Counties, in Michigan’s Upper Peninsula. This high-quality property will be offered for sale in its entirety as a lump sum, single-phase, sealed bid event. Offers will not be considered for individual tracts.

THE PROPERTY
Vulcan is located about 25 miles south of Houghton in the area of Twin Lakes. This property is known to be a well-managed, high quality Sugar Maple forest. The Upper Great Lakes Region has numerous markets for many forest products, and Vulcan is well-positioned to take advantage of these markets. The property has an improved road system throughout, allowing for both summer and winter harvesting with little immediate investment. The productive acres of the property are better than average with less than 1% being non-forested.

DATA ROOM
AFM has set up an electronic data room containing information for bidders to use as they evaluate the property. Access to the data room will be permitted only to prospective bidders who have executed a Non-Disclosure Agreement (NDA) as approved by AFM. The data room will be accessible to such prospective bidders starting on August 30, 2019.

OFFERING PROCESS
Vulcan is being presented for sale in its entirety, as a single stage, lump sum sealed bid event, with no further option to subdivide. Prospective bidders are invited to participate in the process upon execution of the NDA. Final bids will be due October 11, 2019.
There is also a short video of the Vulcan land with drone footage.

Lately the share price of Vulcan has been declining. It peaked at $140 last October but has dropped to $120, possibly reflecting concern about the lack of updates on the liquidation.We know that shareholders have been contacting the company and at least one sent a formal Section 220 request for information about what is going on.

(P.S. The timber sale will also be interesting because the value it puts on northern Michigan timber will be helpful in thinking about what Keweenaw Land Association's timber is worth.)

Just Published: Issue 26 of the Oddball Stocks Newsletter

Happy Friday to all Oddballs!

Just a quick note that we have published Issue 26 of the Newsletter this afternoon. If you are a subscriber, it should be in your inbox right now.

If not, you can sign up right here.

"What is an Oddball Stock?" with Nate Tobik on SNN Network

Nate had an appearance on SNN Network talking about our recent post, "What is an Oddball Stock?"

DuArt Film Laboratories, Inc. Annual Meeting on Tuesday

FYI: the DuArt Film Laboratories, Inc. annual meeting is being held in New York this Tuesday at 10:30 a.m. If you are attended and interested in meeting other Oddballs, get in touch with us.

DuArt sold its Western Broadcasting of Puerto Rico subsidiary in November. The sales proceeds were $3 million versus a book value of $391k of the assets sold.

Boston Sand & Gravel Company - 2018 Annual Report

See our earlier post that contains an excerpt from Issue 21 of the Newsletter (published last August) about Boston Sand & Gravel Company (BSND). The company announced that the annual meting was going to be held in Boston on July 25th, which was very short notice. Highlights from the annual report:
  • They sold a 12 acre intermodal site in Everett, MA for $14.3 million. That is 24% of the market capitalization of the company. The gain on sale was $14.16 million, so the book value had significantly understated the value.
  • "Capital additions for the year totaled $4.5 million as the Company focused on reinvestment in its ready mix plants and fleet, as well as continuing to improve the infrastructure for its short line railroad." Both this year and last year, capital expenditures exceeded depreciation.
  • "The first quarter of 2019 has gotten off to a slow start as several downtown projects have been stalled coming out of the ground. The much discussed federal infrastructure spending package has not come to fruition, so our Company continues to rely heavily on large downtown high rise projects funded primarily by strong foreign investment."
  • A dividend of $30 per share was declared and paid in January 2019. 
  • Gross profit was up slightly but SG&A was up more, resulting in a decline in operating profit from $5.6 million to $4.8 million (-14%). 
At a share price of $600 and 100,327 shares issued and outstanding, the company's market capitalization is $60.2 million, compared to a book value of $54.5 million. The company has $29.2 million of cash and short term investments and $22 million of total liabilities, so the balance sheet is strong. There is also $9.6 million of real estate under development.

We'll have more about this one in the upcoming August Issue of the Oddball Stocks Newsletter. Until then, make sure you see Issue 25 of the Newsletter, and if you are missing any back Issues, you can get them here.

Oddball Update: "Pardee Authorizes Share Repurchases"

Just announced by the company:
PHILADELPHIA, July 10, 2019
Pardee Resources Company (OTC: PDER) (the "Company") announced today that its Board of Directors has authorized the repurchase by the Company of up to $3.5 million of its outstanding common shares in 2019. This stock repurchase program may be carried out through up to $1.5 million in privately negotiated transactions and through up to $2 million in open market purchases. This program provides the Company with the flexibility to repurchase shares opportunistically from time to time based on market and business conditions, stock price and other factors. The Company is not obliged to repurchase any of its common shares and there can be no assurance as to when, or whether, any shares will be repurchased under this program.
Share repurchases were a big topic at the recent annual meeting in May. The most recent Issue (#25) of the Oddball Stocks Newsletter has a detailed account of that meeting as well as thoughts about the valuation and management's incentives to maintain the size of the company rather than sell assets at good prices and return capital.