Seneca Foods: Q4 2024 Results Strong Only Via LIFO (NASDAQ:SENEA)

introduction

I am at Seneca Foods (NASDAQ: SENEA) (NASDAQ:Senev) And I have written two articles about the company in SA so far. The most recent of these was in November 2023, which I mentioned. High margins were not sustainable and rising net debt levels could limit share buybacks.

On June 13, Seneca Foods announced its fourth quarter FY24 results, and the results seemed mixed. Higher selling prices offset lower sales volumes, and the net loss was only $2.2 million, compared to $33.1 million a year ago. However, by applying the FIFO (first in, first out) method of inventory valuation, EBITDA decreased by 22.7% compared to the same period last year. I think this confirms my argument about the unsustainability of high margins, and I’m maintaining a Hold rating on Seneca Foods’ stock. Let’s review.

outline Q4 FY24 Financial Report

In case you’re not familiar with the company or anything I’ve previously reported on, here’s a brief description of the company. Seneca Foods was founded in 1949 and focuses on canned vegetable production (approximately 80% of sales) in the United States. It also manufactures packaged fruit, snack chips, sauces, gravies and natural colorings. The company has a network of 26 facilities across the United States, which includes packaging, canning, seed production plants, agricultural operations and a logistics support network. Seneca Foods’ brands include Seneca, Libby’s, Green Giant, Aunt Nellie’s and CherryMan. There are two classes of shares, the difference is that Class A shares have 1/20th of the voting rights per share while Class B shares have full voting rights per share.

Overall, the Company operates a highly competitive seasonal business with strong sales and net income in the second and third quarters of its fiscal year. Seneca Foods’ sales peak in the third quarter of the fiscal year due to increased retail demand during the holiday season, and inventory tends to peak in mid-fall when corn and beans are harvested. Food packaging is minimal in the fourth quarter, when Seneca Foods typically performs repair and maintenance activities. In this regard, we were surprised to see that the company’s losses in the fourth quarter of FY24 were significantly reduced compared to the previous year. Net sales decreased 7% year over year to $308 million, but the impact on operating margins was offset by higher selling prices. Digging deeper, it’s important to note that the company uses a last-in-first-out (LIFO) inventory valuation method, which resulted in a $2.7 million decrease in operating income compared to $52.3 million in the prior year period. Additionally, in the fourth quarter of FY23, restructuring costs increased by $1.3 million due to plant closures.

Using the internationally dominant FIFO method, EBITDA for the fourth quarter of FY24 was $23.1 million, compared to $29.8 million in the year-ago quarter. Overall, Seneca Foods’ results this quarter will only look good if it doesn’t change its accounting methods.

Looking at the balance sheet, net debt jumped from $470.5 million a year ago to $632.6 million as inventory increased by $201.8 million due to higher raw material costs. The company also invested $33 million in share buybacks during FY24. Overall, Seneca Foods’ debt load is a concern, given that the weighted average interest rate on its revolving credit facility is 6.93% compared to 6.34% a year ago (page 5 of the fiscal 24 fourth quarter financial report).

Company’s future and valuation

Seneca Foods operates as a mature business with low margins and has barely grown its profits over the past decade, as you can see in the table below. Operating profit levels were erratic and sensitive to vegetable price fluctuations. Using the LIFO approach, FY24 was strong in terms of EBITDA, but when converted to the FIFO approach, the numbers look underwhelming. In my opinion, FY25 revenue and EBITDA using the FIFO approach are likely to be similar to FY24, considering that this is a mature business that is not sensitive to macroeconomic cycles. As net debt increases, FY25 net profit is expected to decline by low double digits. We believe that due to peak inventories, debt levels and interest expenses will increase significantly in the second and third quarters of FY25, which may limit share buybacks in the coming months.

If we pay attention to valuation, we see that Seneca Foods is trading at 6.7x EV/EBITDA and a similar P/E. This level hasn’t been this low in over a year, with a price-to-tangible book value ratio of 0.7x. Overall, the company doesn’t look expensive based on historical financial multiples, but it doesn’t look particularly cheap either. Due to the lack of potential positive catalysts, we believe investors should avoid shares of Seneca Foods at current levels.

Investor Takeaways

Using the LIFO method, Seneca Foods’ financial results for the fourth quarter of FY24 look good, but switching to the FIFO method makes the picture not look good. This is a mature business with low growth and erratic operating margins. While it could be argued that Seneca Foods is undervalued, trading at just 0.7x real book value, the counter-argument is that this ratio has only been above 1x on a few days over the past decade. Without a positive catalyst for the business going forward, Seneca Foods could become a value trap, and we believe there are much better investment opportunities in the market today. Overall, I don’t plan on opening a position here unless the price-to-tangible book-value ratio falls to around 0.6x.