February 19, 2010 - 6:33pm EST by
2010 2011
Price: 105.00 EPS $25.00 20?
Shares Out. (in M): 1 P/E 4.0x 5.0x
Market Cap (in $M): 78 P/FCF n/a n/a
Net Debt (in $M): 66 EBIT 29 28
TEV ($): 170 TEV/EBIT 6.0x 6.0x

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This is a long recommendation for the shares of Hanover Foods, a vertically integrated vegetable and food company.  The investment thesis really boils down to the following:   Despite a liquidity discount, a minority share discount, lack of transparency, and reprehensible corporate governance - 4 times earnings for a consumer non-cyclical food company is an irresistible valuation.    There is no catalyst here.  It is just a cheap stock.  I categorize it as a "one day" stock.  Meaning that one day I will wake up and read a press release that Hanover Foods has been acquired for a meaningful premium to current prices - or this is the hope.

Hanover Foods has some brand recognition, in some markets, but is primarily involved in private label products.

There are two classes of stock, class A  and class B.  Class B symbol is HNFSB.PK  and has one vote per share.  Class A symbol is HNFSA.PK, and has no votes.  The company "went dark" (deregistered from the SEC) in the fourth quarter of 2004.   The only way to obtain quarterly or annual reports is to be a shareholder.   Owning one share either as a registered owner, or in street name, will get you an annual report, and quarterly reports. 

A starting point for a curious investor would be form SC 13E3 filed with the SEC 12-06-04.  This filing includes a valuation by accounting firm Gocial Gerstein LLC, which in my opinion conservatively values  the A shares at 131.00 per share.  The objective of this valuation was for the company to value the shares in order get rid of their smaller shareholders, reduce their shareholder list below 300, and deregister.   My personal belief is that most VIC members do their own due diligence.  Rather than cut and paste the details of the valuation, my preference is to simply provide the link. 


At this point you might remark:  "Ok, big deal, the HNFSA trades at around 100."    Others might wonder how much the company has made since going private?  The short answer is since being conservatively valued at 131 per share the company has earned and retained ....roughly 80$ per share.   So using a not-very-fancy method of valuing the shares, a simpleton investor might say 131ish plus 80ish  is 211ish.

Why is it so cheap then?  Where should I start...

The company, to my knowledge, has not had an annual meeting in four years.  The company is registered in the state of Pennsylvania, which is notorious for siding with corporate management.  Compounding the problem is something called the Employee Stock Trust, colloquially referred to by accountants as a "Rabbi Trust."  This is a very murky topic, admittedly, for me.  But, for some reason these shares do not count for anything other than voting rights.  They appear in the annual report in the Stockholder's Equity sections, and raise some concerns when trying to evaluate how many shares are actually outstanding.  Several investors I know that are involved in the stock, prefer to error on the safe side and count these shares as outstanding when determining book value.  Gocial Gerstein, ignores the shares in the EST and uses 740,000 shares outstanding.  They ignore the 340,000 shares in the trust.  I once talked to their current auditor at BDO Seidman (they do provide audited financials).  I posed the question as simply as possible:  "If the company is acquired for say 400 million in cash, do the shares in the "rabbi trust" get cashed out."  His answer:  "No, they just disappear."  "The cash gets divided amongst the 740,000 shares only?"  "Yes".


There is also a long running family feud that has embroiled the company in a legal battle.  I am reluctant to post all the details of this legal battle in this portion of the report, primarily based on the amount of time it would require for me to do it accurately. 


The shares are closely held.  Normally the HNFSB trades at a premium to the A.  Currently the B stock is offered at 105 and the A stock is offered at 104.  If the difference is only a dollar I would suggest buying the B stock at the higher price.  For some reason there seems to be plenty of B shares available lately, which is rare.  If the B goes a little higher, compared to the A, I would buy the A.

Heartland Value Fund owns roughly 49,000 shares, I think.

I created a gmail account so that I could post the 2009 report on "google docs."   By clicking on this link, it should bring up the most recent annual report, but it will take a little bit of time to load.




No known catalyst.

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