Overhill Farms is splitting its portions: Its supermarket business is down, but restaurant sales are booming.

And prospects for the Vernon manufacturer of frozen food appear appetizing since it established a joint venture that can get its products onto even more menus.

Investors are finding the situation to their taste, too. The company’s stock has soared by more than one-third in recent weeks, on the heels of a quarterly earnings report that showed restaurant revenue had doubled.

“The strategic move to restaurant food service was a pretty simple decision, because that’s where the growth is,” said Chief Executive James Rudis. “It took a lot of time to execute, but now it’s coming to fruition.”

Originally a supplier of airline food, Overhill makes frozen meals, side dishes, soups and sauces for restaurants. In addition the company makes private-label products for grocers and big box retailers such as Safeway Inc. and Walmart’s Sam’s Club. It also is a supplier to major-label makers of prepared foods such as Jenny Craig Inc.

In Overhill’s Feb. 4 quarterly filing, the company reported net income had risen 21 percent to $3 million, while revenue was up slightly to $56.2 million.

Most impressive was the food service division’s $19.2 million in revenue, which was up $9.7 million from the previous year. The unit benefited from the well-documented trend of diners trading down to cheap fast-food restaurants during the recession. Among Overhill’s customers are fast-food chains Panda Express, Jack in the Box and El Pollo Loco.

The restaurant business got a further boost in September when Overhill entered into a joint venture with J.R. Simplot Co., one of the nation’s largest privately owned companies and a major supplier of French fries to McDonald’s.

While Simplot is big, with some $4 billion in annual revenue, the Boise, Idaho, company’s product offerings are relatively limited. Simplot will use its vast network of salespeople to sell Overhill products, broadening Simplot’s appeal as a one-stop supplier.

“It’s a good fit because a large percentage of their business is French fried potatoes, whereas we have a whole different product list,” Rudis said. “Given their reach, it has huge potential for both of us.”

Among the wide variety of prepared foods Overhill makes are everything from orange ginger beef and filet in sundried tomato butter to penne Bolognese and salmon stuffed with dill sauce.

Flip side

However, the same recessionary forces that have driven up the company’s restaurant sales have taken a toll on the grocery end of the business. Profit margins at supermarket private labels, such as those sold at Safeway, have been squeezed as the recession drove major brands to cut prices, forcing private labels to go even lower.

What’s more, Overhill was hit hard when H.J. Heinz Co., which is famous for its ketchup but also makes Budget Gourmet frozen dinners and other products, trimmed its orders. Overhill would not disclose what it supplies Heinz, noting its contract prohibits such a disclosure. But Rudis acknowledged the supermarket business is tough.

“Right now it’s a pretty messy marketplace,” Rudis said. “There are products from the major chains sold as cheap as we’ve ever seen them.”

Mike Gilles, president of Growth Group, a food service consulting firm in Dana Point, said Overhill’s grocery business is suffering from extraordinary low margins.

“There are literally hundreds of companies that do private labels. This market is extraordinarily sensitive to penny profits,” Gilles said.

However, Gilles believes Overhill has the capacity to overcome the loss because of its capacity to produce many different types of foods.

“There are a large number of private-label packers out there, but few with as broad a capability as Overhill. Most stick to one type of protein; the chicken pluckers make chicken dishes, for example,” he said.

Even so, the company is still relatively small compared with its competitors and doesn’t draw a lot of attention. It has no regular Wall Street coverage, though now and then some analysts check in – and they don’t like what they see.

A Reuters ProVestor report found Overhill “trades at a lower multiple of trailing earnings than the average for the food processing industry.” A recent report from SADIF Investment Analytics described Overhill as “a below average company with a neutral outlook,” especially when compared with its closest peer, Seneca Foods Corp. in Marion, N.Y. A supplier of canned fruits and vegetables for private-label supermarket brands, Seneca has nearly six times the revenue of Overhill.

But that imbalance could change somewhat. Overhill took advantage of its strong net income to make a voluntary debt prepayment of $5 million in the last quarter. If profits keep coming, Rudis plans to use them to acquire other food service companies, buy back stock or pay a dividend – something the company’s never done.

Overhill had some other good news, too. There are signs that the company will prevail in litigation over the 2009 firing of 254 employees because their Social Security numbers didn’t match their names in an Internal Revenue Service database. After Latino activist Nativo Lopez organized protests and called for a boycott of Overhill customers, the company filed a lawsuit in Orange County Superior Court alleging extortion and defamation.

On Nov. 13, a judge ruled that Overhill “had established a probability of prevailing on the merits, and had submitted substantial evidence that the defendants’ accusations of racism were false,” according to the company’s filing.

The United Food & Commercial Workers Union, which represents 80 percent of Overhill’s work force, filed a grievance over the firings, but the company hopes to mend fences.

“There’s still some work to do, but we hope the aggravation and spending is mostly over,” Rudis said. “We have had a good relationship with the union and we will again.”