First Stock Pick: $JBSS
Note: This post and purchased first occurred under my original WordPress blog on 1/31/21
Ok, it’s been three months since my introduction. So, what have I been doing in all this time? After all, this is a “value” investing blog.
Have I found a notable company trading below net cash?
Worked out the value of a microcap about to be liquidated?
Found a merger arbitrage with an attractive spread and nice margin of safety?
To answer those questions: No, nope, and probably not anytime soon.
Ladies and gentlemen, the first stock I present to you for the portfolio is John B. Sanfilippo and Son (ticker: JBSS): a quality compounder trading at a very reasonable price.
JBSS is a mostly vertically integrated nut processor and packager that sells them under their private labels, to food service companies, and to other manufacturers that then uses the nuts in their own products. Founded in 1959, the company was nothing more but a modest stalwart until it ran into two major headwinds in 2000s. In the first half of the decade, the Atkins diet took United States by storm, and correspondingly nut prices skyrocketed. JBSS was caught flatfooted when nut prices eventually fell back to earth, and their gross margins along with their stock price were decimated by 80%.
Their subsequent turnaround was even messier. JBSS was forced to violate their debt covenants multiple times, they shut down their cash bleeding almond handling business, and consolidated their nut processing operations. Then in 2008, they were hit by another whammy with the recession, which further depressed their stock price. Like a teenage girl going through middle school, the 2000s were rough on JBSS.
If the 2000s was JBSS’s rough middle school experience, then the 2010s was their coming of age story. Since 2010 JBSS has initiated an impressive turnaround which has led to:
Revenue increasing by 60%
EPS growing at 13.3% CAGR
EBITDA growing over 370%, or 13.9% CAGR
Operating margins nearly quadrupling
EBITDA margins increasing from 3.6% to 10.3%
Total debt capitalization falling by 68%
Return on invested capital growing from a meager 1% to a formidable 19%
And all the credit for this turnaround goes to the management team.
Its important to note that the company is ran and effectively controlled by two families: The Sanfilippos (50.9% of shares) and the Valentines (23% of the shares). The CEO of company is a Sanfilippo, The CFO of the company is a Valentine, the two families are entitled to elect 4 of the 6 directors for the board; if its not clear yet, JBSS is and will remain a family affair for the foreseeable future.
With the rags to riches story complete, what did JBSS's management do with this newfound wealth? They consistently and generously rewarded shareholders.
Between regular and special dividends, JBSS’s management team has paid a dividend yield between 4-7% of its stock price to its shareholders since 2012. Not bad for a family operated business that could have just as easily squandered the fortune.
So why is JBSS, despite their impressive turnaround and shareholder oriented philosophy, mispriced? For starters, their food and out servicing businesses have been hard hit by the pandemic, with revenue being down at least 15% for each sector. Fisher Nuts, their leading consumer brand, begun to face competition from a private label at one of the major retailers in fiscal 2019, which is just now beginning to affect the financial statements. As with most small caps, the stock has little analyst coverage on the sell-side, with the only analyst from Sidoti posting periodic updates each year.
Unfortunately, JBSS has little control over their analyst coverage but I believe that management is more than competent enough to overcome these (short term) hurdles. It should be no surprise that the pandemic has made the community bowl of nuts go out of fashion. Just thinking about using a shared peanut bowl with stranger reminds of the opening scene to Contagion, where Gwyneth Paltrow’s character sits at an airport bar eating peanuts from a communal bowl, and the camera lingers on every surface she touches. With vaccines going out worldwide, I trust that this segment should be back to normal in 2022 at the latest and for the foreseeable. Manufacturing is much of the same short term COVID related problem. Customers dealt with supply side issues in the first/second which forced them to halt or cancel contracts with JBSS. For example, one customer was forced to cancel a $5.1M packaging contract back in the first quarter due to a lack of peanuts. For now, businesses have adjusted back to normal since the supply/demand shock in first quarter and much like the food service business should normalize in the next 2-3 years, if not the next 2-3 quarters.
Looking forward, I also expect JBSS to be highly free cash flow generative over the next few years. As it stands, total capacity utilization for their shelling, processing, and packaging planets sits at 50%. If we add in production from their Garyburg’s factory, which was damaged in a fire earlier this year and plans to be permanently closed, we get to 54%. I am optimistic about the consolidation and believe that further concentration should contribute to some economies of scales in terms of operational costs and efficiency over the next few years. Secondly, with so much unused capacity, JBSS has little reason to use free cash flow to expand operations or purchase new plants, allowing them to return more cash to shareholders for the foreseeable future.
In terms of valuation, JBSS is trading at an incredibly reasonable price for its business quality. It currently trades at roughly ~15x the average of free cash flow the last 3 years, 15x earnings, and only ~12 EV/EBIT. So multiple appreciation is certainly in the cards for JBSS, especially due to its business quality and strong returns on capital. However, I think JBSS is a company where multiple appreciation alone isn’t needed for an investment to succeed. Over the last five years, EPS has grown at 11% CAGR and management has paid out at least 4% of the stock price out in dividends. With their balance sheet deleveraging, dividends and share buybacks should accelerate too, further compounding returns for shareholders.
At the end of the day, JBSS is a high-quality business, with a management team focused on improving operations, and a shareholder oriented philosophy. With it being our first stock pick, the company will serve as fine cornerstone for the rest of our portfolio.
Note: On January 26th, $10,000 worth of $JBSS was purchased at $81.46 a share.