Hispanica (HISP): An Attractive Play in a Consolidating Industry
December 8, 2016 1:15 pm ET
3G Capital is seeking to raise $8 billion to $10 billion for a new buyout fund targeting an acquisition in the consumer sector, according to the Brazil Journal. Last year, the private equity fund purchased Kraft Foods Group Inc. and merged it with H.J. Heinz in a $46 billion deal with Warren Buffett’s Berkshire Hathaway. The new funding sent shares of U.S. packaged food companies higher as investors speculated that they would be the next big targets.
As consumer preferences evolve from processed to fresh foods, many of these potential target companies have struggled with slowing revenue and narrowing profit margins. 3G Capital is well known for pressuring companies to cut costs and increase margins using zero-based budgeting and other techniques. At the same time, the firm looks for acquisition targets to create larger companies capable of realizing significant economies of scale.
In this article, we will look at a micro-cap company that’s taking a growth-oriented approach to the market rather than taking temporary cost-cutting actions.
Faster Growing Markets
Hispanica International Delights of America (OTCQB: HISP) is an ethnic food and beverages company that distributes fruit juices, nectars, and milk based products, as well as teas, carbonated drinks, dried goods, preserves, and bakery products.
The Hispanic population accounts for nearly 20% of the U.S. population or approximately 56.6 million citizens, according to the U.S. Census. By 2020, the government organization believes that Hispanics will account for nearly 30% of the population at about 120 million citizens, representing a significant growth rate over the coming years. These families are increasingly seeking out ethnic foods categories that are underserved by packaged food giants.
Ethnic foods are also becoming increasingly popular among the general population. According to Mintel Research, 90% of all 25 to 34-year-old adults have prepared ethnic foods at home over the past month. This compares to less than 70% of adults over the age of 65 that have cooked ethnic foods at home over the past month. The palates of all Americans appear to be evolving to include ethnic foods rather than traditional U.S. staples.
Capitalizing on the Trends
Hispanica aims to capitalize on these trends by building a fully-integrated ethnic food and beverage business through a combination of organic growth, mergers, and exclusive distribution agreements with some of the top retailers and brands in the country.
The company began by establishing a $7.5 million credit facility with TCA Global Credit Master Fund LP (“TCA”) in early July 2016 that would be used to provide operating capital and funding for acquisitions and expansions within the ethnic food industry. With the funding in hand, the company differentiates itself from many development-stage competitors that don’t have the flexibility to execute on their business plans and grow quickly.
Just days later, the company used the capital to acquire Energy Source Distributors (“ESD”), which provided $3 million in annual revenue, a 15,000 square foot warehouse, and distribution channels into more than two thousand locations, including 7 Eleven, Safeway, Nob Hill, Lucky’s, Walmart and others. The company plans to leverage these channels to launch its own proprietary products in a bid to increase revenue and profit margins over time.
Hispanica reported first quarter revenue that increased around 400% to $649,411 as it began shipping two proprietary product lines – Gran Nevada and Tropic Max Plantain Chips – through ESD from its warehouses in Northern California. Gross margins of 23% are attractive for the food industry, but management’s plans to introduce exclusive brands could significantly boost them over the coming quarters as it expands its market reach.
Investors should watch for a number of upcoming catalysts, including a second strategic acquisition that will expand its footprint, as well as increased distribution to over 5,000 retail locations over the coming months. By accelerating its revenue and improving margins, management will bring the company closer to a positive cash flow that will put it on stable financial footing as it looks to become a leader in the ethnic foods industry.
For more information, visit the company’s website at www.hispanicadelights.com.