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:
- 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.
- 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.
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.