JOUT - Johnson Outdoors: Holding But Definitely Not Adding

Summary

• I think Johnson Outdoors is a fine company in many ways that has a very strong balance sheet, and that rewards shareholders handsomely.
• The problem is the valuation. Relative to when I most recently reviewed the shares, the valuation has risen dramatically, the dividend yield has fallen. This isn't auspicious in my view.
• I'll put the company on my watchlist and buy aggressively if the shares drop in price. Given my desire to preserve capital, I can't buy it at the moment.

The shares of Johnson Outdoors Inc. ( JOUT ) are up about 22.6% against a loss of about 2.6% for the S&P 500 since I published my "holding fast" article on the company way back in November of 2022. Now that the shares have spiked higher from $55.85 to $68.50, I've regained some of my unrealised losses on this name. I bought a bit, uh, "prematurely" the year prior . Anyway, the shares rose dramatically because of the great financial performance in the fourth quarter, so I thought I'd review the financials yet again. Additionally, I want to look at the stock again to see if it makes sense to buy more, take my lumps and sell, or hold the stock.

In case you're the sort of reader who wants a bit more than bullet points, but much less than what you'd get in one of my typical articles, I present you with this "thesis statement" paragraph. It's here where I give you the gist of my thinking so you can decide whether or not it's worth your while to wade through the entire piece. You're welcome. Anyway, I think Jonson Outdoors is a fine company, and I'm happy to hang on to my relatively small stake in the company. The problem is profitability has fallen in spite of rising sales. Additionally, the valuation is way higher now, and the dividend yield is way lower now than when I last reviewed the name. So, at current prices, investors are paying more and getting less. That's not a recipe for long term success in my estimation, and for that reason I can't recommend adding to the position at the moment.

Financial Snapshot

Revenue in 2022 was off by only 1.1% when compared to 2021. In my view, this is quite a feat in light of the fact that sales in 2021 were a record for the company, and were 26.5% greater than they were in 2020, and 32% higher than they were in 2019. Gross profit dropped fairly significantly in 2022 as a result of a $54.5 million, or 13% uptick in cost of sales. Given inflation effects over the past while, this should come as no surprise. On the income side, 2022 was "middling" in my view. In spite of the aforementioned 32% uptick in revenue compared to 2019, net income in 2022 was actually lower by about 13.5%. That written, I think the dividend is well covered, as evidence by the fact that the payout ratio sits around at only 27%.

Additionally, the capital structure continues to be quite strong in my view. Cash, for instance, represents fully 67.6% of total liabilities. The probability of insolvency, or this company needing to go back to the capital markets for financing is very remote. Additionally, I like the fact that their interest expense has been negative since 2020.

Given the above, I'd be very happy to buy more at current levels, assuming the price is reasonable.

The Stock

If you're one of my regular readers, you know exactly what time it is. It's time for me to point out, yet again, that "companies" and "stocks" are different things. It's also time for me to be a total "buzzkill", as the young people say, because I remind investors that a great, solidly profitable company like this one, can be a terrible investment at the wrong price.

Taking the first point first, the business generates revenue and profits, and the stock is a speculative instrument that gets traded around based on long term expectations about the business. Given that the financial statement valuation of the business is "backward looking" and the stock is a forecast about the distant future, there's an inevitable tension between the two. The tension is highlighted by the fact that the business designs, manufactures, and sells seasonal and outdoor products. The stock, on the other hand, is buffeted by a host of factors, some of which have nothing to do with those activities. One of the things that affects the performance of a given stock, for example, is the crowd's ever-changing views about the desirability of "stocks" as an asset class. There's no way to prove this definitively, as it's an obvious counterfactual, but a reasonable argument could be made to suggest that Johnson Outdoor stock would have done even better recently had the overall market not swooned since I last wrote about the business.

So this is why I consider the stock as a thing distinct from the business. The former is often a poor proxy for what's going on at the company, and I think it's possible to profitably exploit this disconnect. In my view, the only way to successfully trade stocks is to spot the discrepancies between what the crowd is assuming about a given company and subsequent results. What I want to see in this regard is a stock that the crowd is somewhat pessimistic about that goes on to exceed expectations. When the crowd is pessimistic, the shares are cheap, which is why I try to buy only cheap stocks. In my previous piece, in case you've forgotten, I decided to hang on to the shares because they were relatively cheap, sporting a PE of ~13.4. Even after the very decent fourth quarter, the shares are now about 17% more expensive, per the following:

As shareholders who buy at current levels are paying more, they're getting far less, given that the dividend yield has collapsed, down about 41% from 2.2% to 1.33%. I'm not a big fan of paying more and getting less.

So, in my view, the shares are no longer as compelling as they were when I last reviewed the name.

My regulars know that I think ratios can be instructive, but I also want to try to work out what the market is "thinking" about a given investment. If you read my stuff regularly, you know that the way I do this is by turning to the work of Professor Stephen Penman and his book "Accounting for Value" for this. In this book, Penman walks investors through how they can apply some pretty basic math to a standard finance formula in order to work out what the market is "thinking" about a given company's future growth. This involves isolating the "g" (growth) variable in this formula. In case you find Penman's writing a bit opaque, you might want to try "Expectations Investing" by Mauboussin and Rappaport. These two have also introduced the idea of using the stock price itself as a source of information, and we can infer what the market is currently "expecting" about the future. Applying this approach to Johnson Outdoors at the moment suggests the market is assuming that this company will grow earnings at a rate of ~4.5% in perpetuity. I consider that to be a pretty optimistic forecast for this company, but is especially so in this case in my view.

Given this optimistic forecast, and given that investors are paying more, and getting less, I can't recommend adding to the shares at the moment.

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