Tickers in this Article: OFI, SWY, AMR, TSN, CAG, HNZ
In the early 20th century, Clarence Birdseye witnessed native fishermen freezing fish in the Arctic air of Labrador. He noticed how quickly the fish became frozen and therefore retained their flavor and texture. The experience drove him to invent the quick freezing of food in the 1920s, first offering products for sale in 1930.

Birds Eye Foods still exists today, and frozen-food companies can thank the Brooklynite for their very existence. This includes Overhill Farms (AMEX:OFI), a small company from the Los Angeles area. Founded in 1995, it produces frozen-food products for clients as diverse as Safeway (NYSE:SWY), Panda Restaurant Group, Jenny Craig and AMR Corporation (NYSE:AMR).

Stock Is Hot
Overhill's stock is up 59% in the last 52 weeks vs. -21% for the S&P 500. In February, it rejected an offer from GESD Capital Partners and Citicorp Venture Capital for $4.40 a share. Management suggested the offer was too low, not accurately reflecting the intrinsic value of its stock given its potential; further, it deserved a much higher valuation. At the time, the stock was trading slightly below the offer price. Since then, it's gained 37% against the backdrop of a down market. In fact, $100 invested at the end of 2002 was worth $194.77 at the end of 2007, the S&P 500 $184.53 and its peer group $167.49. Overhill did this despite middling growth. What's the secret?

Consistent Growth
In early August, Overhill announced solid third-quarter earnings. Revenue was up 17.5% to $62.4 million. Net income was $3.2 million, up 187% from $1.1 million a year ago. Gross profit margins were 13.5%, up from 10.0% last year. Year-to-date revenue for the first nine months was $185.7 million, up 33% or $46.1 million from $139.6 million. Net income was $7.9 million, an increase of 126% from $3.5 million, translating into earnings per share of 50 cents. Sales have grown from $137 million in 2003 to $192.6 million in 2007. The operating income went from $1.84 million in 2003 to $11.9 million in 2007.

The good news: its numbers are much higher five years later. The bad news: operating income was flat between 2005 and 2007. On balance, though, business is good. (Learn what it means to do your homework on a company's performance and reporting practices before investing. Check out Advanced Financial Statement Analysis.)

Where's The Beef?
Using an internal sales force as well as outside food brokers, two customers - Panda Restaurants and Jenny Craig - accounted for 27% and 26% of revenue in 2007. While it's worrisome that 53% of sales is limited to just two companies, the situation improved in 2007 from 2006, when the number was 63% - a full 10% higher.

Things are getting better, and Overhill could be considered competition with much bigger rivals Tyson Foods (NYSE:TSN) and ConAgra Foods (NYSE:CAG). A potential problem area is its sales to airlines in 2007, which were $19.7 million or 10.2% of total revenue. With airlines having trouble, this could affect revenue. That's the only major potential problem. In 2007, revenue was up substantially due to the addition of two new retail customer lines and increased food service sales. Retail revenue was up $33.4 million or 41.2% to $114.4 million, a majority of the gain resulting from Safeway's launch of 24 private-label items in early 2007. Management anticipates that most of its growth in revenue in 2008 will come from the retail segment. Hopefully, it can improve gross profit, which was down 240 basis points to 10.4% in 2007.

Positive Outlook
Independent equity analyst Singular Research initiated coverage of Overhill this week. Singular believes it will generate higher sales and earnings in 2009 and beyond because of new customers and additional business from existing customers. Due to its value-oriented nature, in tough economic times it's able to take sales from suppliers that are more expensive. In addition, due to being smaller, it can handle production runs that competitors such as H.J. Heinz (NYSE:HNZ) simply can't. Thus, Heinz and other bigger firms come to Overhill to fulfill special orders.

In good times and bad, Overhill possesses the flexibility a much larger competitor doesn't. Once the economy improves, it should generate sales from Jenny Craig and other higher-end customers. (Learn economics principles such as the relationship of supply and demand, elasticity, utility and more in Economics Basics and Recession: What Does It Mean To Investors?)

Bottom Line
My only concern here is Overhill's debt level. With approximately $40 million in long-term debt, twice its shareholder equity, any bump in the road would hurt. However, its current debt level is consistent with the past five years and shareholders' equity has improved considerably. I don't see why it can't test its 52-week high of $9.82 in the coming weeks.

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