Vertical Integration And ERP System Will Improve Supply Chain Efficiencies By 2025

Key Takeaways

• Vertical integration and a centralized purchasing program aim to improve efficiencies, enhance margins, and streamline procurement across all categories by 2025.
  
• Facility upgrades and e-commerce expansion are expected to optimize distribution networks, reduce costs, and capture new revenue streams.
  
• Rising competition and increased expenses challenge HF Foods Group's margins, while strategic investments may strain short-term financials despite future growth potential.

Catalysts

Operates as a marketer and distributor of fresh produce, frozen and dry food, and non-food products to primarily independently operated Asian restaurants, and other foodservice customers in the United States.

• The centralized purchasing program has been rolled out for the seafood category and will extend to all categories by 2025, expected to streamline procurement and leverage scale, potentially improving gross margins due to increased purchasing power.
  
• The vertical integration of cooking oil operations, alongside the new ERP system, is anticipated to enhance operational efficiencies and long-term margin expansion by improving the supply chain and internal processing capabilities.
  
• Facility upgrades, including the renovation of Charlotte and expansion in Atlanta and Las Vegas, are set to optimize the distribution network and reduce transportation costs, likely improving net margins through increased efficiency and cost savings.
  
• The launch and expansion of an e-commerce business in 2025 aim to capture higher-margin sales opportunities and cater to new customer segments, possibly enhancing revenue streams and overall gross margin profile as digital sales channels grow.
  
• Strategic cost optimization efforts aim to reduce distribution, selling, and administrative expenses by 3% to 5% by the end of 2025, which could improve operating income and net margins as efficiency measures take effect.

HF Foods Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HF Foods Group's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.2% today to 1.9% in 3 years time.
• Analysts expect earnings to reach $24.3 million (and earnings per share of $0.47) by about December 2027, up from $-1.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2027 earnings, up from -102.0x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 25.3x.
• Analysts expect the number of shares outstanding to decline by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

HF Foods Group Future Earnings Per Share Growth

Risks

• Increased competition in the distribution market and slowdown in the restaurant industry, especially with weaker consumer spending, pose risks to revenue growth and could pressure net margins.
  
• Margins on meat and poultry have decreased, leading to lower gross profit, which could continue impacting earnings if not offset by cost-saving initiatives or by growth in higher-margin segments such as seafood.
  
• The reliance on wholesale sales, which have lower margins than retail sales, may lead to muted net margin expansion, affecting overall profitability despite potential long-term benefits.
  
• Increased distribution, selling, and administrative expenses due to higher rental and insurance costs, coupled with a net loss in the latest quarter, indicate financial pressure that could strain operating income if not effectively managed.
  
• Ongoing strategic investments, such as facility upgrades and ERP rollout, while necessary, are significant capital expenditures that could weigh on short-term earnings and cash flow until the anticipated benefits materialize.

Valuation

• The analysts have a consensus price target of $6.0 for HF Foods Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.3 billion, earnings will come to $24.3 million, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 7.2%.
• Given the current share price of $3.66, the analyst's price target of $6.0 is 39.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.