2023-04-13 10:16:43 ET
Summary
- A healthy order backlog and a strong mix of recurring revenue should benefit the top line.
- The company is improving its bottom line by restructuring its cost structure.
- Based on DCF calculations and relative valuation, I have a buy rating on the stock.
Investment Thesis
John Bean Technologies' (JBT) top line should continue to benefit from the healthy order backlog and a mix of recurring revenue, despite a slowdown in macroeconomic activity. Recently, the company also launched its digital solution, named OmniBlu, which is a subscription-based service to further strengthen its recurring revenue stream. On the margin front, JBT is making productivity improvements in its production plants, expanding its supplier network, and implementing price increases to manage supply chain constraints and inflation. The company plans to separate its AeroTech business, which should further enhance its value. Given the healthy prospects and lower valuation, I have a buy rating on the stock.
Revenue Analysis and Outlook
In terms of top-line growth, the commercial environment in 2022 was characterized by strong demand for JBT's goods and services, particularly in North America. Moreover, the company's revenue benefited from the acquisitions of Bevcorp and Alco-food-machines in 2022. Higher demand in FoodTech was driven primarily by customers' needs for greater capacity, labor savings, yield, food safety, and sustainability. On the AeroTech side, the company continued to experience a strong recovery in the aerospace and defense markets. In 2022, the company's revenue increased by 16% Y/Y to $2.16 billion, with the FoodTech segment's revenue increasing by 13.6% Y/Y to $1.59 billion and the AeroTech segment's revenue increasing by 23% Y/Y to $575.7 mn.
2022 order by end market (Investor Presentation)
Looking ahead to 2023, I believe the revenue growth should continue due to a strong order backlog and a mix of recurring revenue streams. In Q4 FY22, the orders in the FoodTech segment increased by 24% sequentially to $432 million due to the healthy demand in the pet food, food and vegetable, infant formula, and pharmaceutical end markets. In the AeroTech segment, orders increased by 42% sequentially due to the strong demand from the commercial airline markets. The strong demand across both segments led to a 28% sequential increase in orders across the company. Additionally, the order backlog at the end of 2022 was $1.05 billion, which is 5% higher than the prior year. JBT's installed base of equipment serves as a source of recurring revenue from aftermarket products, parts, services, and lease agreements. Recurring revenue accounted for 47% of the FoodTech segment's revenue and 38% of the AeroTech segment's revenue in 2022. The company is further expanding its recurring revenue stream by investing in its digital solution, OmniBlu. The company launched OmniBlu in 2022, which is a subscription-based offering that delivers improved access to parts and services, advanced functionality, and measurable results for its customers.
JBT is planning to separate its AeroTech business to completely become a food technology company. The company will announce a defined path in the first half of 2023, with transaction execution in the second half. This move underscores JBT's confidence in the future prospects of the food technology industry and its commitment to delivering value to its customers and shareholders. I believe this move was way past due, as the company has been strengthening its FoodTech business through acquisitions over the past few years.
Profitability
adjusted operating margin and adjusted EBITDA margin (Created by DzD Analysis by taking data from JBT)
Despite significant growth in revenues in 2022, margins declined due to the challenges associated with supply chain disruptions, high inflation, and labor availability affecting both FoodTech and AeroTech segments. The adjusted EBITDA margins declined by 60 bps Y/Y to 12.9% and adjusted operating margins declined by 20 bps Y/Y to 9.2%.
Segment-wise adjusted operating margin (Created by DzD Analysis by taking data from JBT)
Looking ahead to 2023, JBT is taking action to address supply chain constraints and inflation, which should improve margins. These actions include making productivity improvements in its production plants, expanding its supplier network, and implementing price increases. Additionally, in the third quarter of 2022, the company implemented a restructuring plan (the "2022/2023 restructuring plan") to optimize the overall FoodTech cost structure on a global basis. The initiatives under this plan include streamlining operations and its general and administrative infrastructure. As of December 31, 2022, the cost of this plan is $5.4 million, and a total cost of full implementation in the range of $8.0 million to $10.0 million is expected to be recognized by the end of 2023. The cumulative savings associated with this plan are in the range of $9.0 million to $12.0 million, with a range of $5.0 million to $6.0 million expected to be realized in 2023 and the remainder in 2024. Given these initiatives and the sale of lower-margin AeroTech businesses, the company's margins should improve in the medium to long term.
Valuation
In my DCF calculations, I am assuming revenue growth to be in the high-single digits in 2023 given the healthy order backlog and a healthy mix of recurring revenue. Beyond 2023, I have assumed growth to be in the mid to high-single digits, with a terminal growth rate in the mid-single digits as the company will continue to benefit from the developments in the food and beverage industry. I used a discount rate of 6.43% by using the cost of equity of 7.65% and arrived at a fair value of $129.40 for JBT.
Using the relative valuation, the stock is currently trading at 19.61x FY23 consensus EPS estimates of $5.32 and 16.89x FY24 consensus EPS estimates of $6.18, which is below its five-year average forward P/E of 24.82x. Hence, I believe the stock is undervalued.
Conclusion
JBT's stock has been range-bound over the last six years. However, with the separation of its AeroTech business, the company should be able to better focus on its food technology business by bringing in new products and expanding through acquisitions. JBT has already been acquiring FoodTech companies over the last few years and should continue to do so in the future. Additionally, the restructuring action taken by the company in 2022 should benefit the bottom line. Given these developments, I believe that JBT is a good buy at current levels. With a renewed focus on its food technology business, a strong track record of acquisitions, and restructuring efforts underway, the company is well-positioned for growth in the years to come in my view.
For further details see:
John Bean Technologies: A Recipe For Success