Where Food Comes From: A Great Company Trading At Expensive Prices

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Where Food Comes From (NASDAQ:WFCF) is an auditor for nan nutrient proviso concatenation that helps companies certify to value standards. Their main statement of business is related to cattle ranchers, but they are expanding into organic products, animal care, and nutrient manufacturing facilities.

The institution operates successful an absorbing manufacture pinch awesome portion economics, and I judge they person a bully strategy for growth. It has been increasing revenues and profits consistently, has nary debt, and is managed by its founders and largest shareholders.

Despite each these absorbing characteristics, nan institution trades astatine a aggregate to net and FCF that is excessively high, successful my opinion. The company's existent valuation requires important maturation ahead. The company's roadworthy to maturation is not a consecutive line. It has galore competitors, immoderate of which are overmuch larger, while others run connected a non-profit basis.

Note: Unless different stated, each accusation has been obtained from WFCF's filings pinch nan SEC.

Business description

Food proviso concatenation auditor: WFCF helps its clients execute certifications for nan products they sell. These certifications see root and property for cattle, integrated processes for vegetables, FDA value standards for manufacturing facilities, and sourcing for retailers. In total, WFCF helps its clients pinch almost 30 different certifications.

Experience pinch cattle: Although nan institution does not disclose nan percent of gross generated by its industries, I judge a important information comes from cattle ranchers.

Reasons see that it utilized nan sanction IMI Global, which is now a subsidiary, earlier changing its name. This subsidiary is mostly dedicated to certifications for ranchers. It besides shows much labor connected its webpage compared to nan remainder of nan subsidiaries.

Further, nan company's founders person occupied salient positions successful nan nutrient industry. For example, nan company's President and COO was nan Chairman of nan U.S. Meat Export Federation betwixt 2015 and 2016.

Finally, successful nan Process Verified Program work providers list published by nan FDA (a database of verification services for cattle ranchers), IMI Global services are listed connected a abstracted page alternatively of successful nan array for illustration different providers because nan institution has truthful galore services.

Great manufacture economics: Certification has absorbing economics. For example, according to IMI Global, nan costs of certifying a cattle head's property and root tin beryllium arsenic debased arsenic $3.5, while nan premiums paid connected nan marketplace tin scope $10 per head. For verified earthy beef, nan certification costs $4.5/head for large operations, but premiums tin scope $56/head (of course, including higher accumulation costs).

Usually, erstwhile a constituent (like a certification) is captious for a business but represents a mini information of full costs, it puts nan component's supplier successful a bully bargaining position. The rancher will not haggle connected nan certification value that overmuch if it represents 10% of nan costs but is an basal cardinal to obtaining 100% of gross upside. Most of nan time, certification is mandatory for entering circumstantial markets, peculiarly successful nutrient exporting.

Further, nan process tin beryllium automated for nan astir portion and requires a mini building pinch bully operating leverage. As of FY21, WFCF had 80 full-time labor serving 15 1000 clients.

A maturation strategy that works: The institution has grown revenues and profits steadily while keeping its margins healthy.

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The institution has grown done 2 strategies.

First, it has acquired 10 companies astatine comparatively mini (not needfully low) prices, which has allowed it to grow to different markets, leveraging its structure. The company's goodwill and intangibles show that it has not importantly overpaid for these businesses, moreover though they are asset-light and should person recorded intangibles.

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Second, and this is speculative, fixed that nan institution does not disclose it, I judge it charges a debased introduction value to pull nan customer to triumph nan astir profitable recurrent business. For example, IMI Global charges nary installation audit costs but a recurrent costs per caput certified. Another illustration is WFCFO, a subsidiary that useful pinch integrated nutrient certifications. On its value database for nan Paleo Diet certification, nan institution offers a mini value of $1,250 for registering up to 5 products, leaving nan ongoing installation auditing costs up for quoting. The aforesaid pricing strategy is utilized for USDA Organic certifications.

Strong equilibrium sheet: WFCF has nary indebtedness and has $6 cardinal successful rate reserves. The institution has besides repurchased shares for nan past 2 years, reducing nan stock count by 5%.

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Managers are owners and founders: The Saunders family, founders of nan company, inhabit nan astir important managerial positions. John Saunders is CEO and Chairman of nan Board, while his wife, Leann Saunders, is COO and President. According to nan company's proxy connection for FY21, they ain 28.4% of nan stock, while different 2 members of nan Board ain 10% each, meaning that insiders ain much than 50% of nan company. I judge manager-owner is nan champion type of managerial structure.


Multiples: The main problem pinch WFCF is nan banal price. The institution presently trades astatine a marketplace headdress of $82 million. Still, it generates little than $3 cardinal successful nett income and a small much successful FCF, fixed that it amortizes acquired intangibles but has nary corresponding CAPEX expenses.

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This implies a aggregate to net and FCF supra 30x. The problem pinch specified a precocious aggregate to net is that nan investor has to beryllium definite that maturation will continue. Since FY18, nan institution has grown operating income astatine a CAGR of 21%, but tin this continue?

How overmuch growth?: There is nary elemental look for comparing maturation pinch existent yields, but we tin usage immoderate numerical examples.

Company A trades astatine $100 cardinal and generates $10 cardinal successful nett income (P/E ratio of 10x). Company B besides trades astatine $100 cardinal but generates only $3.3 cardinal successful nett income (P/E ratio of 30x, conscionable for illustration WFCF). Further, we see that Company B will turn faster than Company A for immoderate clip (growth differential period). After that maturation differential period, some companies will waste astatine 10 times their then-current earnings.

How galore years of growth, astatine what rate, are down a P/E ratio of 30x compared to 1 of 10x? For some investments to return nan same, Company B has to turn 10 percent points much than Company A for 15 years; aliases 20 percent points much than Company A for 10 years.

Therefore, for WFCF to return nan aforesaid arsenic a institution presently trading astatine a P/E of 10x, it should turn 20 pp. faster for almost 10 years. That is simply a very difficult presumption to make.

If WFCF banal traded astatine a P/E ratio of 20x, nan maturation assumptions would beryllium lighter. That is, 5 years increasing 20 pp. faster would suffice, aliases 10 years increasing 10 pp. faster.

Not nan only competitor: Other companies run successful nan aforesaid conception arsenic WFCF. Some are overmuch bigger, and galore are non for profit. For example, NSF International is simply a not-for-profit pinch revenues of $123 cardinal successful 2020. SCS Global Services, a for-profit, has revenues of $40 million. Finally, giants like SGS person billions successful revenue.

These companies do not ore only connected nutrient certification but compete successful these segments. Further, location are smaller, much section competitors, for example, nan sixteen listed for cattle successful nan USDA Process Verification Program providers list.

Further, successful nan cattle segment, packers tin tally their PVP programs without their ranchers having nan cattle pre-certified astatine nan source.

I do not spot a moat: Unfortunately, I do not spot really WFCF could make a moat successful this market, fixed that they do not ain nan certifications they offer. They are only auditors.

True, immoderate certifications (like USDA PVP) person compliance requirements that could go a obstruction to entry, but only to super-small competitors. WFCF offers galore services that its competitors don't, but they could besides drawback up.

I judge WFCF's marketplace is increasing because certification is simply a caller trend. Still, it will yet modulation to maturity (beef accumulation and exports turn beneath nan economy), and past title will eat margins.


I for illustration galore things astir WFCF: it operates successful a increasing marketplace pinch absorbing customer-power characteristics, it has shown maturation while protecting profitability, it is owner-managed, and it has a beardown equilibrium sheet.

Unfortunately, WFCF's banal value is excessively demanding regarding early profitability maturation successful position of rates and magnitude of nan maturation period. I do not judge WFCF tin prolong those maturation figures for truthful long, fixed that location are bigger competitors successful nan market, immoderate of which are not-for-profit, and nan institution does not person a moat.

For that reason, I for illustration to hold for much charismatic introduction prices earlier considering WFCF.

Editor's Note: This article covers 1 aliases much microcap stocks. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

Tomas Andrade Campanini floor plan picture

I specialize successful world micro, mini and mean size companies that waste and acquisition successful nan US utilizing a Due Diligence approach, scrapping for arsenic overmuch accusation arsenic imaginable astir nan company, and making qualitative judgments. I speak 5 languages (Spanish, English, Chinese, Italian, Portuguese). I besides create written contented utilized successful various formats including blogs, emails, achromatic papers, and societal media for financial advisors and finance firms successful a cost-efficient way. My passion is putting a communicative to financial data. Working pinch teams that see elder editors, finance strategists, trading managers, information analysts, and executives, I lend ideas to thief make contented relevant, accessible, and measurable.Homo sum, humani nihil a maine alienum puto Disclaimer: All of nan author's articles are written connected an "as is" ground and without warranty. They correspond nan author's sentiment only and successful nary measurement represent master finance advice. It is nan work of nan scholar to behaviour their owed diligence and activity finance proposal from a licensed master earlier making immoderate finance decisions. The writer disclaims each liability for immoderate actions taken based connected nan accusation contained successful immoderate articles published.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga

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