Hanover Foods part 1, the story

Before I start I want to thank a reader who has sent me a lot of valuable information that made this post possible.  I'd seen Hanover Foods in the Walkers Manual, but without some of the documents emailed to me I'd have likely passed over it.

Sometimes a company carries a stereotype, a company that makes products we use daily might be considered high quality, a medical device company is viewed as good, while a cigarette company has a bad label.  Hanover Foods is no different they carry with them a number of stereotypes, unlisted company, and controlled by a founding family, and hard to understand.  All of these stereotypes turn off potential investors, but I think once one looks past them there's a lot of value to be uncovered.

Why Hanover?

After reading the intro the your first thought is probably: "Are they even worth investing in?"  The investment case for Hanover Foods is simple and laid out at a summary level below.

First off the company went dark in 2004 paying shareholders $131/share for their A shares, at the time the A shares were trading in the same range they are now ($80/sh range), a considerable premium.  During the going private transaction a valuation was completed which pegged the fair market value of the A shares at $131 and the B shares at $138.  At the time of going dark the book value of Hanover Foods was $99/sh.  Fast forward to today:

• Earned $16.24/sh in 2011 has a current P/E of 5
• Grew book value from $137/sh in 2004 to $250/sh in 2011
• Liquidation value of $99.39/sh
• The company has an outstanding offer to buy employee owned shares purchased before 1988 at $150/sh.
• $37.89/sh of cash from operations for a P/CF of 2.16
• FCF of $23.79/sh for a P/FCF of 3.44
• EV/EBIT of 4.45 and EV/FCF of 4.59

What is Hanover Foods?

I don't think an investor can understand why Hanover Foods is a good investment without understanding what they do and some of their history.  The history is critical to this investment.

Hanover Foods was founded as a local vegetable canning company in eastern Pennsylvania by Harry Warehime in 1924.  In the early 1950s Hanover expanded from canning into selling quick frozen vegetables.  In 1955 Harry's son Alan took over as President and CEO expanding the company into snack foods and growing Hanover into a fully integrated food manufacturer.  The company purchased a Guatemalan food producer allowing Hanover to grow their own vegetables year round.

In 1990 the grandson of Harry Warehime, John took over as CEO of Hanover Foods.  The way Alan controlled the Hanover company was through a voting trust which owned a large amount of B shares.  On Alan's death control of the trust was passed to John.  The beneficiaries of the trust were Alan's three children and five grandchildren, but only John was able to vote the shares.

In the years following Alan's death Hanover continued to grow as a business and experience turmoil at the top.  Michael Warehime and John became entangled in a number of legal battles for control over the voting trust.  There is a considerable amount of documentation out there if anyone wants to read about this at a more detailed level.  Hanover's old SEC filings (reference page 10) touch on the court cases.

So to sum things up, Hanover Foods is owned by the Warehime family but controlled by John.  The family can't even agree on control and at times in the past have fought over board seats.  A court document I read stated that in 1998 Alan's children hadn't talked to each other in over three years, and given the subsequent court battles I'm guessing this hasn't changed.

The issue with a family held company is an outside investor needs to trust that management will do the right thing, if they don't there's a possible investment loss.  The court battles are troubling, and really put a taint on the owning family.  I don't really know much else about the litigation or family struggles beyond what was in some old annual reports and court documents.  It's unclear if there were some old skeletons driving the lawsuits, or if it was simply a battle for control.

If you take a step back and look at John Warehime's tenure at Hanover from a strictly pragmatic view he's done quite well as a manager.  As mentioned above equity has grown quite nicely over the years.  The company has been consistently paying down debt while steadily acquiring complimentary food companies over the years.

The biggest question mark with regards to Hanover and the family is who takes over for John?  John Warehime is currently 75 and it's unclear how long he'll continue in the CEO role.  His three children are all listed in the annual report as being on the board of directors, with the same title "Assistant to the Chairman".  My presumption would be one of his children takes over, which could be a catalyst for some sort of change in ownership structure or dividend.

The Products

Hanover Foods grows, packages and distributes a wide variety of frozen vegetables, snack foods, and other ready to heat and eat types of foods.  As part of my research into Hanover I went down to the local grocery store to browse the coolers.  In this grocery they had three coolers full of frozen veggies, 1/3 a private label brand (could be Hanover?), 1/3 Hanover and 1/3 Birds Eye.  My wife claims Birds Eye is a premium brand, I wouldn't know, I can't really tell the difference between them.  The Hanover items were on sale but the sale price was still slightly higher than the generic brand they sat next to.  Interestingly enough the Hanover items had sold very well compared to the generic (lack of inventory).  So people were purchasing their products even though they could get a generic frozen vegetable for a few dimes less.

I didn't end up buying any Hanover frozen veggies which might seem strange, but we have them all the time here along with the occasional Troyer bag of chips.  When I browed the Hanover website I felt that I could confidently say I'd probably eaten 40-50% of their products.

Other cheap factors

The two other factors I listed that I feel are the cause of Hanover's cheapness are the fact that the shares are unlisted, and secondly some aspects of the company are hard to understand.

I will touch on some of the difficult to understand items in another post, but want to quickly address the unlisted status.  Hanover went dark giving the reasoning that they wanted to save filing fees and compliance costs.  This was popular back in the early to mid 2000s but seems to have trailed off.

A lot of companies that have gone dark are small companies, Hanover isn't that tiny, they have a market cap of $61m at current prices and sales of $425m.  The company distributes quarterly reports to shareholders as well as an annual report.  The reports aren't much more than the current financial statements, but the statements are very robust compared to some of the dark companies I've looked at.

Next..

I'm going to do another post on Hanover looking at some of the financial aspects of the company in support of the bullet points I posted at the top of this post.  I want to examine the financials for completeness sake, but at this point if Hanover doesn't look like a good investment to you seeing a bunch of facts and figures probably isn't going to change your mind.  I'm hoping to have a follow up post in the next week or so.

Ticker: HNFSA, HNFSB

Talk to Nate about Hanover Foods

Disclosure: Long Hanover B shares and adding more as the opportunity arises