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Food Inflation is Here and JBSS is Paying the Price

February 03, 2011 | About:
It’s refreshing to come across a company that when you ask them what they do, they can answer with one word: Nuts. That’s it. Nothing special, nothing fancy. No product line diversions into some other industry. Just nuts. When you talk to this company about diversification, they think about coating nuts with chocolate. John B. Sanfilippo & Son (JBSS) is that company. It’s a $120 million nut company. They operate under the Fisher Nuts and Sunshine Country brand, and also offer private label nuts.

JBSS is a stark example that inflation is here. While Ben Bernanke talks about the money supply decreasing, the costs of food and commodities explode to the upside. JBSS recently released their Q2 fiscal 2011 earnings, which covers the last quarter of 2010, and their raw nut input costs increased by 35% YoY. That’s serious inflation, and they can’t raise prices fast enough. In that same time period, JBSS raised prices by 15.6% on average, and they’ve got additional price increases coming online in the next quarter, but they’re still falling behind. This is the primary reason why their net profit was down in the last quarter to $0.48 per share compared to $0.82 in Q2 2010, while revenue was up 24%.

In normal times, you can look at JBSS’s history and pretty clearly tell yourself that this is a cheap company. They’re trading at .6 times book value. They’re generating plenty of cash, but how do you take into account their increased costs? Yes, JBSS is pushing through price increases, but at a lower rate than they’re paying out. That simply can’t continue. Two scenarios:



  1. The commodity costs stop rising and JBSS continues to be able to push through price increases. If this happens, JBSS is the place to be. If they can push through 10% price increases, it would all go to the bottom line and we’d likely find support for the stock price in the $25 range.
  2. Input costs keep climbing in addition to JBSS pushing through price increases. If this continues to happen, at some point they’re going to swing back to a loss, and nobody knows where the share price could go.
Which of these two scenarios do you think are more likely? Unfortunately, in my opinion, it’s got to be number 2. You just can’t put your money on input costs going flat. At that point you’d have to value JBSS by their assets and not by their income statement, which would not yield a good result.

While I like the company, and the simplicity of their product line, it’s difficult to get on board with such little visibility. I’m afraid the risk for earnings is primarily on the downside. Until we can be assured that JBSS price increases can increase faster than their input costs, margins will continue to be depressed. This unpredictability is exactly the risk as bottom up inflation comes upon us. This company has to be set aside in the wait and watch pile even though it’s been on the 52 week low list for the last two weeks.

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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Comments

StokeyBob
StokeyBob - 3 years ago
When I started looking into where the money was coming from to buy off the politicians and subvert the immigration laws of the world I came across what may be the root of many of our problems. Fiat Money.

No matter how much real money people can put together to build their countries the way they want there are those that can print up what ever it takes to get their way.

Maybe this will help make the danger of fiat money clear.

Imagine you and me are setting across from each other. We create enough money to represent all of the world's wealth. Each one of us has one SUPER Dollar in front of him.

You own half of everything and so do I.

I'm the government though. I get bribed into creating a Central Bank.

You're not doing what I want you to be doing so I print up myself eight more SUPER Dollars to manipulate you with.

All of a sudden your SUPER Dollar only represents one tenth of the wealth of the world!

That isn't the only thing though. You need to get busy and get to work because YOU'VE BEEN STIFFED with the bill for the money I PRINTED UP to get YOU TO DO what I WANTED.

That to me represents what has been happening to the economy, and us, and why so many of our occupations just can't keep up with the fake money presses.

We are going to have to regain control of our government before we can regain control of our currency and regain control of our country.

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