Opinions Ben Cheng
Clearwater Seafoods Inc. CLR.TOTOP PICKDec 09, 2002
Ben ChengStock price when the opinion was issued
As of Jan 26, 2021. Market Open.
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He doesn’t think the new tariffs will hurt the stock because they sell into Europe and Asia. However, the US has opened a lot of fishing areas, which has significantly depressed clam prices. The Canadian government also took away one of Clearwater’s clam licenses and gave it to an indigenous nation. However, there were ethical issues in that process and the license is coming back up for bids. In the meantime, it is going back to Clearwater for a year. That will help. In general, it is a good company that is facing a lot of headwinds. It also has a lot of debt. He isn’t ready to buy YET. He wants to see a turnaround in the pricing of their products.
They used to hold this, but sold it a year ago following a couple of choppy earnings quarters. They had taken on sizable debt on an acquisition and have yet to see the fishing volume be in line with expectations of the street. They recently reported 5 times leverage on the balance sheet despite better earnings. This is not something they are interested in.
(A Top Pick Aug 29/17, Down 46%) He sold earlier in the year. They have a fair amount of debt and people thought they had monopolies but recently there were a couple of cases with licenses being awarded to other groups like first nations. Investors got worried about the balance sheet.
He exited this about 9 months ago after a couple of bad quarters. He thinks the majority owners, who hold over 50%, will likely look to take this private at some time. They have missed several targets lately and he does not like the debt levels as they may trigger covenants in the future.
He has owned this before. The stock has been very tough recently. The business used to have monopoly positions with licenses that protected their investment. Recently, licenses have been awarded to other companies and this puts into question their monopoly position. This had read to a revaluation of the company. The company also has a fair bit of leverage on its balance sheets, and with recent stock performance, it is not in a position to raise capital.
He has a small short in this stock and considers this a hold. He is concerned about a recent Scottish company acquisition as the margins have not proven up. There have been some issues with eastern Canadian offshore licenses. This has led to increased leverage and there is not a lot of excess capital to growth with.
He follows HLF-T but this one is similar. They had a majority of the clam market and the government put up a new license for it and this company did not win, costing about 10% of their business. They added debt over the years. Their margins are falling. They are a bit behind the ball on this taste mix. It is hard to get excited about either at this point in time.
On the surface it looks like a business with very high barriers to entry, with licenses giving them almost monopoly positions. Also, it’s a capital-intensive business, where they put a lot of money into large ships, recouping it through cash flow earned by harvesting seafood. Historically, they’ve generated high returns on capital, and they’ve been good investments, but in certain periods it leads to a lot of spending, negative free cash flow, quarter to quarter volatility. As a value investor, he likes to see a nice steady cash flow stream. With this one, you have to take a very long-term view. If you can do that, it is a pretty good business.
