Clearwater Seafoods: CLR

One of the better pieces of investing advice out there is to “buy what you know”. It basically boils down to: if you use a product/shop at a store/ use a service, and are very happy with it, it’s likely that others do too. If many people are happy with a company’s offerings, that company very well could make a good investment.

The problem in Canada is that there aren’t many publicly traded companies that you likely deal with in your real, not internet, life. You probably deal with one of the big banks (TD, RY, BMO, BNS, CM, NA), shop at one of the big grocery chains (L, EMP), buy gas at a gas station (if you look them up you’ll find these belong to SU, IMO, HSE, PKI, ATD), shop at one of the few publicly traded Canadian stores (CTC, DOL), buy your coffee at Tim’s (QSR), and maybe eat at some of the restaurants (AW.UN, PZA.UN, BPF.UN, IRG). I firmly believe that it’s at least partly the scarcity of consumer stocks out there that have led to the success and growth of the aforementioned stocks. If a mutual fund wants to invest in things people know, there aren’t many companies to choose from, so of course they’re going to pick Canadian Tire and Restaurant Brands International.

There just aren’t many household names on the TSX. It’s unlikely if you know whether your car parts come from Magna (MG) or Exco (XTC). It’s unlikely if you know whether the stuff you buy is shipped on CN rails or CP. It’s unlikely you know if the roads you drive on were built by Aecon (ARE) or were planned by Stantec (STN). When you go to the grocery store, it’s unlikely that you pick up many items which you can then go home and invest in. The best you can do is look somewhere on it and hope you’re supporting Canadian farmers or workers. But there are a few hiding in there, like a mischievous child wanting to scare their parents.

One of those is Clearwater Seafoods. Perhaps you don’t eat a lot of shellfish, so you might not know about this company. They are one of the largest seafood companies in North America, and are considered a vertically integrated producer. They harvest the oceans for the shellfish (lobster, scallops, clams, whelk, snow crab, masago, langoustine), process it in plants or on the vessels, store it and then deliver the final product out. The are a large player in the seafood game.

And there’s a lot to know about the seafood game once you start digging.

The first important thing to know is that now just anybody can fish these things. Regulations put in place require companies to have a license before they can fish for a sell certain species, so holding these licenses is very valuable. For instance, Clearwater is the only company in Canada that can sell wild caught Arctic surf clam. They have almost half of the licenses for sea scallops and Argentine scallops. Other areas of the world use similar license/quota systems, so acquisitions can be very important. In 2015 CLR acquired MacDuff Shellfish, which if you can’t tell is an extremely Scottish shellfish company. This acquisition allows Clearwater more licenses, and licenses in species they previously were unable to harvest and sell.

The second important thing to know is that sustainable fishing is a very serous business. One of the things that attracted me to Clearwater was their commitment to sustainability was evident. It’s constantly talked about by management and in their investor presentations and reports. While every company will talk about this (go look at a lumber company’s ¬†investor presentation), almost every press release and investment by the company had a rationale of increasing the sustainability of their operation. Anything Clearwater puts out publicly is riddled with the word sustainable. That is becoming more and more important with knowledgeable consumers in today’s world.

Now onto some numbers. The real fun stuff!

invest in clearwater
From TMX

As you can see, the past 5 years have been pretty good to shareholders, but right now you can buy shares for the same price as you could in late 2014, despite a lot of growth in the underlying business.

This is a very volatile stock in the best of times. After I bought it was not uncommon to see swings of 3 or 4% regardless of the movement of the broader market. So when I looked at the beta on Clearwater I was not surprised to see it’s -0.11, or next to no correlation with the market. But there is one stock Clearwater does correlate with: High Liner Foods (HLF), the other big seafood stock in Canada.

These tend to trade in sympathy, despite having different niches within the same sector. For those unfamiliar with the company, High Liner is company whose products are mainly the delicious breaded variety of fish. Unfortunately, these kinds of foods are falling quickly out of flavour. The kids are switching to the more natural foods. No breading, little to no seasoning, the healthier fatty fishes as opposed to sole or tilapia.

I had to do that flavour/favour joke. It was practically impossible not to.

High Liner reported earnings on February 22nd, and they were bad. Sales of those breaded products were down more. High Liner is diversifying into healthier fishes, and sales are growing there, but it wan’t enough to offset the breaded declines. This trend has been going on for a while.

But those problems don’t apply to Clearwater. In spite of being very different companies, the sentiments of one extend to the other. The results in the last two years have been the stocks trading very closely.

From TMX

You can see that, especially in the last 6 months, the stocks have moved together. This is despite very different results and valuations. After the third quarter of 2016, HLF reported a 3.9% decline in sales year over year., CLR reported an increase of 31%. HLF reported an increase in adjusted EBITDA of 4.9%, mostly due to lower costs of their raw materials (raw materials is quite literal in the seafood business). CLR reported an increase in adjusted EBITDA of 30%. Clearwater will be anouncing their fourth quarter of and full year 2016 results shortly, but they should be/almost have to be better than High Liner’s.

Now one is obviously in a better position than the other, but a better company isn’t always a better investment. HLF is a classic value stock. Over at Financial Uproar is a very good write-up on the thesis for High Liner Foods. It trades a a very low P/FCF, and is very profitable, despite the dropping sales, which management expects to continue in 2017.

Clearwater meanwhile, can’t be described as a value stock at these levels. It would need to be put in the growth at a reasonable price. It’s trading at a P/E of 24x. Because of a huge increase in¬†working capital (mostly an increase in inventories), Clearwater actually had negative operating cash flow for the first nine months of 2016. They’ve harvested most of their quotas already so inventories will decline in the fourth quarter and should have a positive effect on profitability and cash flow. So you can view it as they can’t sell all that they harvest, or you can view it as they can harvest so much they can’t sell it all. I view it as the latter, but I could be very wrong.

I think that Clearwater offers a chance to invest in the consumer sector of Canada with a publicly traded Canadian company, in a niche that is growing and should continue to, with favourable regulations giving them a virtual monopoly. It’s a stock that is completely uncorrelated from the broad market. And right now the market is not giving Clearwater full credit for their growth opportunities and investments in growth. But don’t consider Clearwater for a value stock.

Disclosure: Long CLR

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