JOUT - Johnson Outdoors Fishing Is Skunked Today

2023-06-09 14:52:31 ET

Summary

• My investment in Johnson Outdoors Inc. has declined by about 41% since late November 2021.
• Despite a 10.8% increase in sales, I will not be buying or selling shares due to the valuation not being compelling either way.
• I will continue to hold the shares, but will not add to their position due to the risk-free 5% return being a more attractive alternative.

There’s no way to sugarcoat it. My investment in Johnson Outdoors Inc. ( JOUT ) has not been one of my better ones. Since I finally turned bullish on the name back in late November of 2021, the shares have declined about 41% against a loss of about 7.75% for the S&P 500. The company has reported earnings since my latest “ hold ” piece on the stock published back in January, so I thought I’d review those again to see if I should continue to hold, take my lumps, or add more on the idea that a stock trading at $61 is a much less risky investment than the same stock when it’s trading at either $68 or (ugh) $106. I’ll make that determination, as I frequently do based on the combination of financial performance and the valuation. If the market has gotten ahead of itself on the downside in my view, I’ll add more. If the market is too optimistic, I’ll get while the getting’s good.

My writing has been described as “a bit extra” by some of my younger readers. For that reason, I have created something I put at the beginning of each of my articles called a “thesis statement.” This allows the reader the opportunity to read my perspective, and then get out before they are exposed to too much of my “Doyle mojo.” No thanks are necessary, as I consider it to be a life mission to make your life as pleasant as possible. I’m not selling the shares because I don’t consider them to be egregiously overpriced, but nor am I buying more. The valuation isn’t compelling either way, but the shares are spinning off about 3.15% less income than an investor can receive on a risk free basis. Taking on more risk to get less money doesn’t make sense where I come from, or anywhere else on Earth, and so I see no reason to buy aggressively here. In other words, the TINA trade no longer exists in my view, given that a risk free 5% return is a very decent alternative to stocks. At the same time, the strength of the balance sheet and the sustainability of the dividends, such as they are, are enough to keep me invested.

Financial Snapshot

The most recent period saw a nice 10.8% uptick in sales, rising $37.3 million from $343 million to $380 million. When compared to the same time in 2019, fuhgeddaboudit, with revenue in 2023 higher by about 264%, or $276 million. This has been a growth company for years with only a few hiccups along the way. The problem here is that investors aren’t compensated by sales, they’re compensated by whatever’s left over after others have been paid. Obviously firms need to pay employees, suppliers, and landlords. Also, lest we forget, our various governments need to whet their beaks. I mean, they need a taste. Anyway, in spite of the fact that revenue is higher by about 10.8%, profit before tax is up only 1%, and net income is actually slightly lower now than it was in 2022, down by 0.08%. The very obvious reason for this is that costs have increased at a higher rate. Cost of sales, marketing & selling, and administration are up by 13%, 16% and 39% respectively.

On the bright side, the capital structure remains very strong, and that’s not nothing in this environment. Specifically cash represents about 55.6% of total liabilities. Additionally, the payout ratio remains relatively low, with A shares paying out at about 30%, and B shares at about 56%. Although I’m troubled by the slow down in profitability, I’m willing to hang on, assuming the valuation is attractive.

The Stock

I’m of the view that the stock is very different from the company that it supposedly represents. For instance, the share price now is approximately the same price as it was in 2018, in spite of the rather large uptick in profits since then. The company manufactures and markets seasonal outdoor recreation products. The stock, on the other hand, is a scrap of virtual paper that gets traded around, and its movements are largely a function of the crowd’s ever changing views about the desirability of said scrap of virtual paper. These views can be informed by things like demographic changes, interest rates, and the desirability of stocks as an asset class. This is why the stock chart looks much more volatile than the chart of earnings over time.

This can be tiresome, but in my experience, the only way to successfully trade stocks over time is by spotting the discrepancy between assumptions about the future and reality. Additionally, people generally do better when they buy cheap assets, because these offer the greatest risk adjusted returns in my estimation. Any bad news the company produces may cause the shares to drop less, as expectations are already low. Any good news may make the shares spike higher .

If you read my stuff regularly, you know that I measure the desirability of stocks in a few ways ranging from the simple to the more complex. On the simple side, I look at the ratio of price to some measure of economic value, like earnings, sales, free cash flow, and the like. When I last reviewed Johnson Outdoors, the shares were trading hands at what I consider to be a very reasonable 15.7 times. The dividend yield, at only 1.33% was less attractive, though. Fast forward a few months and here’s the current lay of the land. The shares are about 12% cheaper on a PE basis, and the dividend yield is about 52% higher, and very near a multi-year high. Additionally, we see by the following exactly how capricious the market has been here. There have been periods where it is willing to pay about 20 times for $1 of earnings, and only a few years later it’s willing to pay only about 12 times earnings. We seem to be slightly below the mid-range of valuation at the moment.

I promised a slightly more complex way to review stock valuations, and I’m about to deliver on that promise. As I wrote, I like to try to work out the assumptions embedded in the current stock price, and one way I do that is by turning to works like Penman’s “Accounting for Value” and Mauboussin and Rappaport’s “Expectations Investing.” These both consider the stock price itself to be a great source of information, and the former in particular helps investors with a roadmap to work out what the market is currently “thinking” about the future of a given business. This involves a bit of high school algebra, where the “g” (growth) variable is isolated in a bog standard finance formula. Applying this approach to Johnson Outdoors at the moment suggests the market is assuming that earnings will grow at a rate of about 5% from current levels. This is fairly optimistic in my view.

In Investing, Everything’s Relative

When we buy “X” we are, by definition, eschewing a series of “Ys.” This is because we’re constantly searching for the best risk adjusted returns. Although the current dividend yield is “higher”, that doesn’t mean it’s “high.” This is highlighted by the fact that the risk free rate is yielding about 315 basis points more than this stock. In this world governed by relative returns, an investor in the stock is getting less to take on much more risk. Where I come from that makes no sense. For that reason, I’m going to continue to hold, though I will not add.

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