Innovative Food: Beaten Down Former Growth Darling Throwing Off Significant Cash

TM Editors Note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence.

Innovative Food (IVFH) is a specialty distributor of high-quality foods to higher-end restaurants and chefs. The company distributes products such as wild salmon and game, fresh wild mushrooms, boutique produce, and cheeses. Such products have more niche, high-end demand among premium restaurants and thus are not covered by the broadline distributors such as US Foods (USFD) and Sysco (SYY).

Over 70% of IVFH's revenues come through a distribution agreement with US Foods, which on the surface sounds risky. However, IVFH processes orders through USF's ordering system for niche, non-broadline products which USF does not carry. IVFH has relationships with the end restaurant/customer, and keeps 6-7 full time chefs on staff. IVFH thus provides a full-spectrum service to the end customer. Orders are typically shipped next-day to the restaurant. As individual products gain traction and become more broadline, ultimately USF begins carrying and distributing them, and IVFH moves deeper into niches.

Innovative Food made a very expensive and regrettable acquisition in 2014 by acquiring The Fresh Diet. The Fresh Diet provides freshly made, pre-made meals to consumers under subscription plans. IVFH's initial intention was to gain access to The Fresh Diet's last-mile infrastructure. In the end, the synergies didn't work and the space proved to be highly competitive, and IVFH sold The Fresh Diet in early 2016 for a restructuring of their debt, which primarily took the form of reducing financial leverage.

IVFH is now a growing, high-ROIC niche business whose value is not being recognized by the market. Due to the messy operating history of the last few years and IVFH's rapid growth, the company's financial potential is not readily apparent to the market. However, the company recently turned the corner, completing their cash obligations to The Fresh Diet in 1Q16, and generating significant cash in 2Q16:

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Brian Harper 1 year ago Author's comment

$IVFH has continued growing rapidly, has expanded margins, and on a ttm basis has earned around 16 cents. They'll be a full tax payer in about 2 years, so that will be a hit to earnings, but I still think they're worth $1.60-1.75 at present.

Joe Economy 2 years ago Member's comment

As a company specializing in higher-end restaurant services, I would be concerned that IVFH would not be a good place to invest. In the event of an economic downturn, what's one of the first areas that people cut back on? Answer: restaurants and entertainment.

Brian Harper 2 years ago Author's comment

I can understand that concern, thus the question is, what would the company be expected to earn in the average year? They were 1/6th the size during the last recession, which was fairly severe, but managed to stay breakeven, and revenue was flat from 06-08, so the biz was fairly resilient. At an enterprise value of about $13 million, against $4 mil in current EBITA, my response is, who cares? The stock is extremely cheap, and the business as judged by ROIC is excellent.

Gary Tanashian 2 years ago Contributor's comment

Interesting. I notice it's right back to the pre-pump levels in the.30 to.50 area where it had flat lined for years.

Brian Harper 2 years ago Author's comment

I think it's quite a different situation than some component maker to AAPL who has massive power over suppliers. I don't think there are any great alternatives for USFD, and the switching costs would be very high as many of the end customers have relationships with IVFH. USFD is highly unlikely to try to supply these small market, niche ingredients which IVFH provide. As a specific product gets larger, USFD ultimately takes it in house and IVFH abandons the category. And its a great biz for USFD, as the business is like a royalty, and very asset lite. $AAPL $USFD $IVFH

Kurt Benson 2 years ago Member's comment

Brian Harper, thanks for sharing your thoughts on $IVFH. I've been considering this stock but am concerned that 70% of #InnovativeFood's revenue comes from a single company - $USFD.

It reminds me of how $GTAT went bankrupt after $AAPL decided not to use it's screens on the #Apple Watch. Aren't there other competitors which could steal US Food's business from them?

Brian Harper 2 years ago Author's comment

Open to any thoughts/feedback, and let me know if you are a significant shareholder