Workers run an assembly line of fish fillets at the High Liner Foods plant in Lunenburg, N.S.PAUL DARROW/The Globe and Mail
Shares of seafood supplier High Liner Foods Inc. have hit some rough waters recently as the company struggles with higher costs and lower margins.
Still, some investors remain on board, lured by its staple food business, U.S. growth and steady dividend, now yielding about 2 per cent.
The Lunenberg, N.S.-based company's stock has fallen about 13 per cent since hitting a record high in August. The drop comes amid lower sales at U.S. restaurants and increased costs for fish such as haddock, which the company hasn't been able to pass on to customers due to the competitive market.
Most analysts are positive on High Liner, citing its aggressive goal to grow earnings through cost cuts and its continued expansion into the U.S. market through acquisitions.
"We are going to begin to see the benefits of High Liner's scale over the next year or two," said Beacon Securities Ltd. analyst Michael Mills, who has $24 price target on the stock. That's about 9 per cent above its current level around $22.
Mr. Mills hiked his rating to "buy" from "hold" last month after the stock's selloff and the company's acquisition of Atlantic Trading Co., a Miami-based importer of frozen salmon fillets from Chile and Norway. The products are sold under the C. Wirthy & Co. brand to Wal-Mart Stores Inc. and its Sam's Club subsidiary. That deal follows its purchase a year ago of Seattle-based frozen seafood and scallop processor American Pride Seafoods LLC.
Among four analysts that cover the stock, three have a "buy" or equivalent rating and one says "hold," according to S&P Capital IQ. The consensus price target over the next year is $24.50.
High Liner hit a record high of $25.47 on Aug. 7, driven by speculation it could be the latest among a growing list of food industry takeovers. The shares dropped a few days later after High Liner reported disappointing second-quarter results, which it blamed on higher costs and slower business at U.S. restaurants.
"Restaurant visits are still not back to where they were in 2007, except for white-tablecloth and fast-casual, both segments where we don't play very much," High Liner chief executive Henry Demone told analysts.
He said the company is working with its customers to come up with new menu items to try to spur sales. High Liner is expected to report its third-quarter results on Friday.
RBC Dominion Securities analyst Sabahat Khan believes High Liner can meet its goal of boosting EBITDA (earnings before interest, taxes, depreciation and amortization) by $150-million (U.S.) by 2016, up from $85-million in 2013.
"[High Liner] has a strong track record of acquiring and integrating seafood businesses," Mr. Khan said in a recent note. He has an "outperform" (buy) on the stock and a $26 target.
Moody's said in August that High Liner has a stronger credit profile when compared to competitor Clearwater Seafoods Inc., "due to its relatively stable business model, larger scale, and stronger presence in its markets." Moody's expects both companies to benefit from strong global demand driven by society's focus on healthier foods and limited seafood supply.
Baskin Wealth Management owns High Liner shares for its clients and chief investment officer Barry Schwartz expects it will be a long-term play.
"We've made a big bet on fish sticks," Mr. Schwartz said. "It's a non-exciting story with exciting cash flow generation."
Peter Hodson, CEO of independent firm 5i Research, likes the company's U.S. growth strategy, but is concerned about the debt it's taking on to expand, especially if there's another economic downturn in North America.
"There's a little bit of uncertainty in the short term versus the long term," he said.