JBSS - John B. Sanfilippo & Son: Why Nut

2023-09-11 04:32:19 ET

Summary

• John B. Sanfilippo & Son has improved margins and diversified its business, making it an attractive stock to watch.
• The company has seen volume growth and price declines, leading to increased sales over the past decade.
• A recent acquisition of assets from TreeHouse Foods will increase exposure to the snack bar category and add to sales.

It was in early 2015 when I urged a cautious tone on shares of John B. Sanfilippo & Son ( JBSS ) after it announced a product recall after valuations have run away a bit.

The company has generally improved its margins over time and diversified the business, with cyclical and volatile earnings largely paid out in the form of (special) dividends.

This improved positioning and a recent interesting deal create some reasons to keep a close eye on the stock, and frankly make me a buyer in the double-digit territory from here onwards.

A Recap

Back in 2015t, John Sanfilippo was (as the same applies today) one of the largest nut processors, operating start-of-the-art nut processing factories, operating a vertically integrated business model with ample experience. The company has expertise in all the major nut categories, including peanuts, pecans, cashew, walnuts, almonds and other nuts. The company has a rich history as a publicly traded family-firm, with the 4th generation leading the business here.

Over the past decade the company has grown volumes by some 50% to over 300 million pounds as prices have actually fallen some 10% over this period of time to just over $3 per pound, on average. Note that volumes of just over 200 million tons in the mid-2010s actually had come down from a near 300 million pounds business in the early 2000s, making that in terms of volumes the business has been stable over the past two decades.

Despite the pricing pressure observed over the past decade, the company has gradually improved margins and profits per pound a bit over time. Mostly supplying nuts through consumer through the grocery channel, the company supplies nuts though commercial ingredients and contract packing divisions as well.

Given the volatility on the bottom line the company has typically relied on special dividends (paid out each year) to distribute earnings, but since 2017 it has started to pay out a regular dividend. This has gradually risen from $0.50 per share to $0.75 per share, still complemented by higher special dividends in each year as well.

The combination of volume growth and price declines made that sales have increased from just over $700 million a decade ago to nearly a billion here. The long term demand outlook for nuts looks good driven by the fact that nuts are regarded as healthy, although supply might be(come) an issue as well over time, certainly amidst climate change.

Where Do We Stand?

Just a couple of weeks ago the company posted its results for the fiscal year 2023. Full year sales rose by nearly 5% to essentially a billion (actually coming in a few hundred thousand dollars below that). Growth was driven by pricing with full year sales volumes falling by nearly 2% to 308 million tons, after volumes fell in the fourth quarter in a more pronounced manner at 9%. This however was almost entirely explained by the impact of the fact that this quarter last year included an additional working week.

The company posted operating profit of $90 million, for margins of 9%, with net earnings reported at $63 million, equal to $5.40 per share, virtually unchanged compared to 2022. That said, the fourth quarter was notably weaker, driven by lower sales volumes, as discussed above. The business operates with a sound financial position, as net debt of $6 million was rather minimal.

The regular dividend was hiked to $0.80 per share, as the company announced a $1.20 per share special dividend. Despite the softer volume trends, the company targets growth again in 2024, notably in private nutrition bars.

With 11.6 million shares now trading at $105, the company commands a $1.22 billion equity valuation, and a similar enterprise valuation, indicating that the business trades at 1.2 times sales and around 20 times earnings. Note that the dividends are particularly important for the business and investors as the company has seen modest sales growth, has not engaged in share buybacks, and dividends are the primary source of income for investors.

The increase in the regular dividend, although minimal at a 0.8% dividend yield, has probably one of the reasons why shares have done well, with the special dividend being much higher in recent years. This has driven shares from the $50 mark in 2015 to the $100 mark pre-pandemic in 2019. What followed was consolidation around the $70 mark as shares rose to a high of $127 earlier this summer, before now settling at $105 per share.

A Deal

Early in September, the company announced a bolt-on deal as it acquired certain assets, which include a manufacturing facility, from Treehouse Foods ( THS ) relating to the snack unit business in a $63 million deal. With the deal the company will increase exposure to the snack bar category.

The deal is set to add $105-$120 million in sales for the remainder of the fiscal year, that is until the end of June of next year. That suggests that the business probably generates some $125-$145 million in annual sales (assuming no seasonality).

This implies that a less than 1 times sales multiple has been paid, while the own business trades over 1 times sales. This is due to the fact that the business is losing money with dilution seen at $0.80-$1.00 per share this year, equal to about $10 million, and this is after accounting for incremental interest expenses.

Despite the dilution, investor were actually upbeat as shares rose from $99 to $105 upon the deal announcement, adding some $70 million to the market value of the firm, despite the anticipated dilution. This is likely the reason why investors like the move, in the sense that the company grows its exposure and is able to serve a full line of snack bars.

A Final Word

With earnings power now seen around $5-6 per share, the overall valuations appear reasonable. The deal is an interesting one, adding 10-15% to pro forma sales, while not increasing the leverage profile in a huge way, but the issue is that some near term earnings dilution is seen.

Investors are accepting this as the long term positioning has been improved with this deal, with TreeHouse regarded as a willing seller here.

Amidst all this, I see largely fair value here for what I regard to be a quality long term business, and would be willing to initiate a position below the $100 mark.

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