Hilton Food (HFG): A Super Predictable Meat Packer with Long-Term “Cost Plus” Contracts and Extreme Customer Concentration at an Expensive – But Actually Not Quite Too Expensive – Price
Hilton Food Group (HFG) trades on the London Stock Exchange. It qualifies as an “overlooked stock” because it has low share turnover (17% per year) and a low beta (0.28) despite having a pretty high market cap (greater than $1 billion in USD terms).
On a purely statistical basis, Hilton Food is one of the most predictable – in fact, in one respect, literally THE most predictable – companies I’m aware of. There’s a reason for this I’ll get into in a second. But, first let me explain what I mean about the predictability here. Over the last 11-13 years, Hilton Food has shown very, very little variation in its operating margin. EBIT margin variation can be measured in terms of ranges (this would be 2.2% to 2.9% in the case of Hilton Food), standard deviations (this would be like 0.2% in the case of Hilton Food) or the coefficient of variation (0.08 in the case of Hilton Food). When talking about margin variation – I almost always am talking about this coefficient of variation, which is the standard deviation scaled to the mean. So, if a company had 27% EBIT margins on average and a 2% standard deviation or a 2.7% average margin and a 0.2% standard deviation – I’d talk about those two situations as if they were equally stable or unstable margins. Another way to look at it would be to think about standard deviations. If you own a stock for any meaningful length of time, you’re going to see one standard deviation and probably two standard deviation moves in margins. You may not see a three standard deviation move. And it’s entirely possible – unless something major changes with the business, which of course, it often does – you won’t see a 4 standard deviation move. With Hilton Food, a move of 4-5 standard deviations to the downside would only be a 1% of sales move in EBIT. Now, margins at Hilton Food are so low that 1% of sales is like 35% of EBIT and awfully close to 50% of earnings. So, it’s a big move. But, 4-5 standard deviation moves in margins are obviously unusual. And you’d be surprised how common 35% of EBIT to 50% of after-tax earnings swings are for many public companies. They happen all the time. I don’t want to go too far into the statistical weeds here – but, I will say that margin fluctuations that literally happen every 1-3 years for a normal company might only happen once in like 1-3 decades for Hilton Food. Now, Hilton Food has not been around for 3 decades (the original plant started operating in 1994 and the company only went public like 12 or so years ago). And what I’ve been discussing here is the predictability of earnings in cases where sales are fixed. Sales fluctuate. So, Hilton Food’s earnings will move around. It’s just that earnings will move around very, very little relative to sales compared to almost any other …Read more