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Inventure Foods: Healthier Snacks Come at a Premium

February 13, 2013 | About:
Headquartered in Phoenix, Az., and listed in 1996, Inventure Foods Inc. (SNAK) is a marketer and manufacturer of specialty food brands in better-for-you and indulgent categories under a variety of company owned and licensed brand names, including Boulder Canyon Natural Foods, Jamba, Rader Farms, T.G.I. Friday's, Nathan's Famous, Vidalia Brands, Poore Brothers, Tato Skins and Bob's Texas Style.

Guru InsightsMario Gabelli initiated a new position in Inventure with a purchase of 31,000 shares at an average price of $6.4 in the third quarter of 2012.

Business QualityInventure has a strong portfolio of national brands, making it the specialty food licensing partner of choice for new market entries. It intends to broaden the distribution of existing brands, through trade advertising and promotional programs with distributors and retailers, in-store advertisements, in-store displays and limited consumer advertising, public relations and coupon programs. For example, Inventure is currently focused on expanding the distribution of its Boulder Canyon Natural Foods brand nationally through the natural channel, the grocery channel, club stores, vending machines, drug and convenience stores.

In addition to increasing distribution and building market share of its existing branded products, Inventure is also constantly on the lookout for new innovative healthy/natural and indulgent specialty food brands that complement its existing business. On Jan. 7, 2013, Inventure announced that it has entered into a licensing agreement with Vidalia Brands Inc., the Georgia brand synonymous with great-tasting sweet onions, to develop a new line of prepackaged snacks for vending, grocery and convenience store distribution, which expands its portfolio of nationally recognized brands that currently includes Jamba, T.G.I. Friday's and Nathan's Famous.

Inventure boasts of a broad and growing distribution across multiple retail segments. It distributes its products through a number of channels including: grocery, natural, club stores, vending machines, drug and convenience stores, with a presence in approximately half of vending machines nationally and 49 of the top 50 convenience store chains representing about 50,000 stores. Inventure's distribution network for its products includes various sales and marketing agencies with employees and offices nationwide, its own sales organization, and an independent network of brokers and distributors.

Inventure is also an innovative manufacturer of healthy/natural and indulgent specialty food brands with state-of-the-art facilities. Its manufacturing facilities include a dough and extruded product manufacturing plant in Indiana, a kettle chip manufacturing plant and warehouse in Arizona and berry farm, processing and storage facility in Washington.

Unlike high production volume conventional continuous line cooking methods utilized by some of its competitors, Inventure's Indiana plant employs a superior batch-frying process which produces premium potato chip products with enhanced crispness and distinctive flavor. It also installed Modular Automated Cooling System (MACS) cooler technology at Lynden facility to improve berry texture and reduce wastage. Inventure also continued its innovation activities by developing new line extensions for its brands, such as Boulder Canyon Natural Foods Garden Select Vegetable Crisps; T.G.I. Friday’s Onion Rings; Nathan’s Famous Crunchy Crinkle Fries; and Jamba Greek yogurt smoothies.

Valuation and Financial AnalysisInventure currently trades at a trailing 12 months P/E of 22.6 and a trailing 12 months EV/EBITDA of 10.2. In terms of asset-based valuation multiples, its current P/B of 2.6 and P/NTA of 3.7 are at premiums of 73% and 38% over their respective five-year averages. Inventure achieved a trailing 12 months ROE of 13.2% and a five-year average ROE of 7.3%.

Inventure Historical Enterprise Value Multiples1360726458136.png

Inventure Historical P/B and P/NTA Multiples1360726526549.png

Inventure was profitable and operating cash flow was positive in 9 of the last 10 years. In contrast, free cash flow was negative in 4 of the past 10 years, reflecting the capital investments needed for its manufacturing facilities. Inventure has high gross profit margin stability, with margins staying in a narrow range of between 18% to 21% for the last decade. This is a result of its raw materials such as potatoes, potato flakes, potato starch, corn, oils and berries being readily available from numerous suppliers on commercially reasonable terms.

Inventure Earnings-Cash Flow Comparison 1360726901554.png

Inventure Profit Margins Analysis1360727094349.png

Financial and Business RisksInventure is moderately geared with a gross debt-to-equity ratio of 47%. The sharp increase in gearing since 2007 was a result of borrowings to finance Inventure's entry into the frozen fruit category with the acquisition of Rader Farms.

Inventure Cash-Debt-Market Capitalization Comparison1360727357573.png

Inventure faces significant customer concentration risk. In 2011, 41% of its net revenues were attributable to its frozen products segment, largely attributable to Rader Farms/Kirkland co-branded frozen berry product sales to Costco. Sales to Costco represented 30% of Inventure's 2011 net revenues.

Inventure's license agreement with T.G.I. Friday’s Inc. expires in May 2014. 28% of its 2011 net revenues were attributable to the T.G.I. Friday’s brand products. Inventure's license agreements with Nathan’s Famous Corporation and Jamba Juice Company expire in 2031 and 2035, respectively.

As a microcap, Inventure lacks liquidity and institutional coverage. However, its recent investor relations and public relations efforts have paid off. Inventure was recently named to Forbes' list of “America's Best Small Companies” in December 2012, and Nathan's Famous Snacks was awarded "Best New Product" by Convenience Store News in October 2012. Inventure also announced that it had been added to the Russell 3000 Index and Russell 2000 Index in June 2012.

ConclusionInventure is a play on consumers seeking healthier snack choices, but comes at a premium as it is trading towards the high end of historical valuation ranges.

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DisclosureThe author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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