OFI

[jmccar2]

I don't know, mbaugh, I think all of these stocks have "issues" if you look deep enough...Bottom line is that OFI seems, by the fundamentals and other measures, to be an awesome buy Like I said, I'm in it now... I'll sell you my shares in a month IF the bottom falls out 

http://www.amex.com/?href=/newsDetails/CmnNewsDet.jsp?id=XpressFeed_NewsDetails_1136997556001.html

[garyaross]

OFI down today on not so good earnings.
fyi

[Trumpitall]

Anybody still watching this one?  I'm thinking about buying.  Seems like it has dropped more than it should have. 

[David Randolph]

I see I was quite enthusiastic about OFI (like in most stocks I buy, of course, or I wouldn't buy them), mainly because of a revenue and earnings multiple comparison to the industry average.

Later I've learned that wasn't the proper way to make fundamental analysis, as other, more important variables had to be considered. I remember of writing about OFI later than this, an analysis not present in this thread, as I was replying a question from realcoolhead.

I'll try to find that analysis and post it in this thread. I'm just catching up with OFI's developments, I want to know what happened to this "safe" food related stock.

[David Randolph]

I remember of writing about OFI later than this, an analysis not present in this thread, as I was replying a question from realcoolhead.

I'll try to find that analysis and post it in this thread.

I can't find the analysis anywhere. Basically I believe OFI helped me understand the importance of profit margins. OFI is a very low margin business and those usually carry a below average valuation in terms of revenue and earnings multiples.

As I've read in this thread, insiders were selling heavily into that monstrous rally back in Q1 2007. Recently the CFO resigned:

• Overhill Farms Announces Resignation of Its Chief Financial Officer
Marketwire (Thu, Aug 30)

I was expecting $250 M - $270 M in revenue for calendar 2007 and $0.50 - $0.60 EPS. Nine months into the year revenue was $152 M, so I figure the 2007 revenue will come in at about $203 M, significantly lower than anticipated, but still in line with what the company promised in the beginning of the year. I was overly optimistic.

EPS in the first three quarters of the year was about half of what I was estimating, just $0.20. I guess the full year number will be about $0.27 EPS, which puts the stock currently trading at about 12.6 times earnings, which isn't particularly cheap, giving the deteriorating EPS.

The news out on the very significant day marked with 1 on the chart below were:

• Overhill Farms Announces Record Revenues for Third Quarter
Marketwire (Wed, Aug

«Gross profit as a percentage of sales was 10.0% for the quarter, compared to 14.1% a year earlier.»

According to the CEO of the company, mainly three aspects put pressure on margins:

1) A new plant they were building and just have finished;

2) The rise in corn and corn related products, poultry and dairy products.

3) Sarbanes-Oxley compliance.

Points 1 and 3 seem to be one time events. It's interesting to know that OFI's profit margin is affected by corn, poultry and dairy products prices. I wonder where one can find information on these prices ... corn is easy, it doubled in 2007 and has been slowly coming off. The others I'll have to investigate further.

Anyway, it will be hard for me to get interested again in OFI as a long term investment, I'm more interested in higher margin businesses. But it doesn't harm to keep it under the radar

[BigSully1]

:57AM S&P futures vs fair value: +11.3. Nasdaq futures vs fair value: +11.0. : Stocks are looking to start the trading day on a high note.  Crude oil is up 0.4% to $88.77 per barrel.

8:45AM Overhill Farms announces former director expresses interest in acquiring co with proposed price of $4.40/share (OFI) 2.52 : Co announces that Louis Giraudo resigned from the co's Board of Directors after the close of business on Monday, February 4, 2008. Mr. Giraudo is a co-founder and Senior Managing Partner of GESD Capital Partners, a private equity firm based in San Francisco. Mr. Giraudo's firm and Citicorp Venture Capital have on two occasions together expressed a non-binding interest in acquiring all the shares of the Company, with a proposed price most recently of $4.40 per share. The terms of the GESD-CVC letter of interest sent on Friday, February 1, required an exclusive negotiation right, barring all other bidders during the exclusivity period, and acceptance of the terms by February 4, the following Monday. This followed an earlier letter from GESD-CVC, and two letters from another would-be acquirer. The co initially declined to grant the exclusivity requested by GESD-CVC, in order to maintain a competitive environment. It also declined to execute any letter of interest four days prior to the scheduled release of quarterly earnings. Mr. Giraudo said he was resigning "as a result of my disagreement with the failure of the Company and its Board of Directors to respond appropriately" to his group's most recent letter, and that the Board failed to "timely pursue this opportunity." The Company 'strongly disagrees' with this characterization.

[David Randolph]

OFI has been in a bidding war since gap 1:



Here's an interesting analysis from Roth Capital Partners:

Consumer Non-Durable
Overhill Farms, Inc. | OFI - $4.22 - AMEX | Buy

Strong Q1 Results May Generate Higher Bids

- Q1 revenues rose 40.2% to $56.8 million, significantly above our $47.0 million estimate, while EPS equaled $0.10 vs. $0.10, above our $0.06 estimate.

- New business from Heinz and Safeway, which commenced in Q2 last year, as well as strong growth in airline revenues, the first meaningful increase in this segment since 9/11, accounted for the sharp revenue growth in the period.

- Gross profit margins declined 310 basis points in Q1, as better than expected revenues from two major customers resulted in the company having to procure additional ingredients at inflated market prices.

- With new contracts in place at the end of the calendar year, we look for meaningful sequential improvement in gross margins over the next two quarters.

- We are increasing our revenue estimate for 2008 to $231.8 million from $215.0 million and for 2009 to $255.0 million from $240.0 million, and our EPS estimate to $0.57 from $0.52 in 2008 and to $0.77 from $0.70 for next year.

- While Overhill is being courted by two private equity firms and had a takeover offer of $4.40 per share on the table, we believe it is reasonable to assume that given the favorable operating outlook Overhill's stock price could meaningfully exceed the proposed takeover bid on its own merits within the next 12-18 months.

- While we do not believe that management necessarily is opposed to an acquisition, we now anticipate that investors will demand a significantly greater premium to the current stock price.

- We retain our BUY recommendation.

SUMMARY

Overhill Farms reported Q1 revenues of $56.8 million, a 40.2% y/y increase and well above our estimate of $47.0 million. EPS equaled $0.10 vs. $0.10, also significantly above our $0.06 estimate for the period.

Several factors accounted for the strong revenue growth in Q1. New business from Heinz and Safeway commenced in Q2 last year, and we believe that revenues from Safeway, in particular, exceeded initial expectations. Another driver of revenue growth in Q1 was airline revenues, which increased 21.7%. Airline revenues had been declining since fiscal 2001, as airlines steadily reduced meal service on most domestic flights. However, this process appears to be at an end, and a sharp increase in the amount of passenger travel accounted for the significant revenue gain in the period.

Gross profit margins declined 310 basis points to 10.5% in Q1, slightly better than our 10.0% estimate, as start-up expenses on new products and on new equipment installed earlier last year were largely put behind. The sharp y/y decline in margins resulted from revenues from major customers, specifically Panda Restaurant Group and Safeway, meaningfully exceeding original expectations. This resulted in Overhill having to procure ingredients at market prices following sharp commodity price increases. In the case of Panda, Overhill retained a portion of the business that it had expected would be diverted to another supplier, and consequently had to purchase product following a runup in poultry prices. The company now has renegotiated
prices for calendar 2008, which should result in a significant sequential improvement in gross margins beginning in Q2. Panda reportedly has agreed to a minimum of $39 million in sales for fiscal 2008, which is above original expectations but which still represents a decline from fiscal 2007 revenues. We anticipate that there is a significant chance that this revenue figure will be exceeded as a result of Panda's rapid expansion and possibly through additional products to be supplied by Overhill. On balance we anticipate that gross margins in fiscal 2008 will improve 150 bps to 11.9%, still well below the 12.8% reported in fiscal 2006. We note that any meaningful decline in commodity prices during fiscal 2008 would bolster the company's profit
margins.

On the basis of the strong Q1 results and with margins expected to improve further with new pricing agreements now in place, we are increasing our revenue and EPS estimates for fiscal 2008 and 2009. Our fiscal 2008 revenue estimate is increased to $231.8 million from $215.0 million, a 20.3% increase from $192.6 million in fiscal 2007. Our EPS estimate for the full year is raised to $0.57 from $0.50, versus $0.29 last year. For fiscal 2009, we are increasing our revenue estimate to $255.0 million from $240.0 million, and our EPS estimate to $0.77 from $0.70.

Overhill has been approached for a potential acquisition by two private equity firms. One bid, for $4.40 per share by GESD Capital Partners, required negotiation exclusivity and acceptance of the terms by 2/4. The company has not released the terms of the second bidder. Overhill had refused to negotiate further until it released Q1 results. Management's rational in this respect seems clear. Reported EPS of $0.10 in Q1, above investor expectations, with anticipated significant profit margin expansion commencing in Q2, implies that EPS in fiscal 2008 should be well above $0.50 per share, with additional earnings growth likely next year as well. On this basis, it is reasonable to assume that Overhill's stock price could meaningfully exceed the proposed takeover bid on its own merits within the next 12-18 months. We do not believe that management necessarily is opposed to an acquisition, but we now anticipate that investors will demand a significantly greater premium to the current stock price. Accordingly, we retain our BUY recommendation.

VALUATION

Our price target of $7.00 implies a P/E of 12.2 times on projected fiscal 2008 EPS of $0.57 and a projected Enterprise Value/EBITDA ratio of 7.2x. At its current price of $4.25, Overhill is trading at approximately 7.4 times estimated fiscal 2008 free cash flow. With a projected annual EPS growth rate of 15%-20% over the next several years, we believe that this low valuation is compelling, even given the company's leveraged balanced sheet and recent uneven earnings trend.

RISKS

Overhill's two largest accounts accounted for 53% of total revenues in fiscal 2007. Even given the anticipated loss of a portion of the business from its largest customer, there is no assurance that either of these accounts will be retained over the long term. Any of the company's supply agreements may be ended for a variety of reasons, including a product line being discontinued, price competition, or production being taken in-house by the customer. There is no assurance that such disruptions will be offset by the capture of new business. Also,
as poultry products account for close to 50% of total sales, a pandemic of bird flu in the United States could cause consumers to significantly reduce consumption of poultry products, which would have a negative effect on Overhill's sales and profits.

COMPANY DESCRIPTION

Overhill Farms, Inc. operates as a custom manufacturer of frozen food products. Its products include entrées, plated meals, meal components, soups, sauces, poultry, and meat and fish specialties. The company offers its products through its internal sales force and outside food brokers. It serves retailers, foodservice, and airline industries. Overhill was formed in 1995 and is headquartered in Vernon, California

My words now: OFI's downside risk is the $4.4 given by the takeover offer and the upside seems to be relatively high, given that fundamentals seem to be improving and there's a bidding war for the company. At this moment I find OFI attractive.

(I mentioned it earlier but it was just on a newsletter to subscribers. I thought I wrote something here too, but no).