Legendary small cap investor Chuck Royce bought a small Wall Street firm called Quest Advisory Corporation in 1972 and the rest as they say is history. One of the many funds he manages is the Royce Micro-Cap Trust (NYSE:RMT), a closed-end fund that invests primarily in companies with market capitalizations less than $500 million. One of its top 10 holdings is Seneca Foods (Nasdaq:SENEA), America's largest processor of fruits and vegetables. Chuck Royce believes in its business and so do I. Here's why.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Cyclical Business

Seneca's business is a simple one. It buys fruits and vegetables through supply contracts with independent growers, and then packs them in cans or freezer bags for sale under their own brands or private label. Production is dependent on growing conditions, crop yields, etc. When weather is good, there is a tendency to overproduce, leading to lower prices in the marketplace. The reverse is true when weather is bad. But there's a fine line, 10% of its processed food is sold under its own brands that include Seneca, Libby's, Aunt Nellie's, Stokely's and Read; another 53% is sold under a private label, 21% is sold to institutional food distributors and the remaining 16% under the Green Giant brand for General Mills (NYSE:GIS).

Over the years it's developed into a vertically integrated, well-oiled machine, delivering fairly consistent earnings despite the vagaries of Mother Nature. In the past decade its gross margins have varied between 6.4 and 11.7% while operating margins have run anywhere from 2.7 to 6.6%. For example, in 2011, its operating margin was at 10-year low of 2.7% due to favorable growing conditions, which produced an oversupply of product and lower selling prices. Once the contracts are struck, the die is cast. Sometimes it works in its favor and sometimes as is the case in 2011, it doesn't.

SEE: 22 Ways To Fight Rising Food Prices


Seneca's goal is to continue to strengthen its position as a leading provider of processed fruits and vegetables in the United States and elsewhere. Its plan focuses on four basic ideas: 1) to expand its private label business as well as its licensed Libby's brand; 2) to provide its customers with the lowest cost, highest quality processed fruits and vegetables; 3) to continually develop new products that allow it to capitalize on the move by consumers to live a healthier lifestyle and 4) to pursue strategic acquisitions that result in no goodwill or other intangible assets on its balance sheet. In the next few paragraphs I'll provide examples of each.

In an effort to expand its private label business, it acquired Chiquita Brands' (NYSE:CQB) processed foods division in 2003 for $125 million and the assumption of $81 million in debt. At the time of the acquisition, Chiquita's division had sales of $404 million making an immediate contribution to its private label business. Prior to the acquisition, private label represented 36% of its overall revenue. In fiscal 2011, that was up to 53%.

Seneca operates 23 processing plants and 29 warehouses in eight states across the U.S. Its vertical integration and size provides it with economies of scale that others can't match. It won't hesitate making an acquisition if it feels it can add value for the customer through its logistics and supply chain. The margins aren't great for processing fruits and vegetables so you have to be very organized if you want to make money consistently, which it does.

People are starved for time these days. In an effort to broaden its offerings in frozen fruit, which is a prime ingredient for smoothies, it acquired Lebanon Valley Cold Storage LP and the assets of Unilink LLC in August 2010 for $20.3 million from Pennsylvania Food Group LLC. Of all its business segments, frozen food is the only one to grow revenues in each of the last two years. Expect further acquisitions in this area in the future.

In business since 1949, it has made over 50 strategic acquisitions including the ones previously mentioned as well as the purchase of Green Giant's processing assets in 1995. Just as it broadened its product offering with the frozen food acquisition above, it did the same in 2006 when it acquired a leading producer of canned fruits. Up until then it sold only canned vegetables. Acquisitions are a key ingredient in its continued success.

SEE: Mergers And Acquisitions: Understanding Takeovers

The Bottom Line

This is the type of business I just love. It's a family controlled enterprise with a long history of success. Its current stock price as of April 25 is $23.35. It hasn't traded below $15 since December 2002 providing investors with a certain amount of downside protection. Yet, if you look at its long-term performance, it's a chronic underperformer. My suggestion is to buy its stock whenever it drops under $20. The longer it stays under $20, the more you should buy. Be patient and you'll do just fine.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  3. Investing

    Top Cities Where Airbnb Is Legal Or Illegal

    Thinking of subletting your apartment on Airbnb? Make sure that you meet your city's regulations first.
  4. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  6. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  9. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  10. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!