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:

IVFH Financial Statement
* Where applicable, numbers in millions. 

IVFH generated cash operating income (EBITA) of $754k in the 2nd quarter of 2016, and we estimate a fully year tally of $3 mil. It's also notable that IVFH carries huge NOLs due to the failed Fresh Diet deal, which should shield the company from paying taxes for years. Net debt is approaching zero, and the company should have minimal interest expense going forward. Based on 32 mil fully diluted shares, we estimate current free cash flow is running around 9 cents a year. The company is thus trading at 5x free cash flow, and a high teens EV/EBIT yield.

Why so cheap? For one, the market may not trust that management won't do another value destructive deal. However, most of the CEO and COO's equity comp was granted in 2014, around the time of the FD acquisition, and they are thus incentivized to maximize the per share value. Additional deals are more likely to be bolt-ons and ways to leverage the IVFH platform. Overhead is relatively fixed, so additional growth in sales either organically or through acquisition would likely have a significant effect on the bottom line.

Additionally, IVFH was touted a couple years ago by Ian Cassell of MicroCapClub, a micro-cap growth oriented investor site. The investor base has historically been much more growth oriented, a group who was probably not thrilled with the 8.5% growth of the 2nd quarter. IVFH is now valued like a value stock, however. Furthermore, at a mere $12.5 mil market cap, IVFH is well under the radar of most investors.

IVFH is an asset-lite business, carrying under $900k in inventory (perishable stuff turns over fast), and only $2.9 mil in invested capital. Assuming $3 mil in annual EBITA, returns on invested capital are over 100%, a demonstration that IVFH possesses a competitive advantage which is difficult for competitors to replicate.

We think IVFH has 130% upside from the current $0.47/shr price, based on a 12x multiple to free cash flow. Upside could be enhanced by additional growth or accretive bolt-on acquisitions. It's also possible that USF ultimately seeks to acquire IVFH.