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Jewett-Cameron: Huge Share Repurchase Plan Is Already Priced In

December 06, 2012 | About:
This is one in a series of articles where I will be covering most of the "30 Obscure, Profitable Stocks" listed by Geoff Gannon on his blog on Nov. 29, 2012. Many thanks to Geoff Gannon for the wonderful list of interesting stock ideas.

Jewett-Cameron Trading Company Ltd. (JCTCF) is a holding company that, through its subsidiaries, operates out of facilities located in North Plains, Ore. Jewett-Cameron Lumber Corporation’s business consists of the manufacturing and distribution of specialty metal products and wholesale distribution of wood products to home centers and other retailers located primarily in the U.S. Greenwood Products is a processor and distributor of industrial wood and other specialty building products principally to customers in the marine and transportation industries in the United States. MSI-PRO is an importer and distributor of pneumatic air tools, industrial clamps, and the Avenger Products line of sawblades and other products. Jewett-Cameron Seed Company is a processor and distributor of agricultural seeds.

Valuation

JCTCF is currently trading at a trailing 12 months P/E of 7.23 and a trailing 12 months EV/EBITDA of 2.34. Its current P/B of 1.12 represents a 21% premium to its five-year average P/B of 0.88. JCTCF achieved 17.5% ROE for the past 12 months and a five-year average ROE of 11.4%.

Financial And Business Risks

JCTCF is debt free with cash and cash equivalents of $7.3 million representing 37% of its current market capitalization of $19.6 million.

JCTCF's single largest customer and its top 10 customers accounted for 20% and 62% of its fiscal year 2012 sales, respectively. Its top 10 customers are based in the U.S., Canada and Mexico, and are primarily in the marine and retail home improvement industries.

The Industrial Wood Products segment under Greenwood Products recorded two consecutive fiscal years of losses, largely attributable to the current depressed economic conditions and weak demand from the marine sector. Boat manufacturers, which accounted for 17% of Greenwood's 2012 sales, continue to work down excess inventory accumulated over the years, an industry recovery is not in sight at the moment. JCTCF is searching for alternative uses for its industrial wood products and developing new customer relationships.

Business Quality and Capital Allocation

JCTCF is profitable for the past decade and generated positive free cash flow in 8 out of the past 10 years.

On Oct. 11, 2012, JCTCF announced that it has voluntarily delisted its common shares from the Toronto Stock Exchange. This will help to save unnecessary costs associated with listing requirements on the Toronto Stock Exchange.

JCTCF does not pay a dividend. On Aug. 17, 2012, JCTCF announced the board of directors had authorized a new Rule 10b-18 share repurchase plan to purchase for cancellation up to 400,000 common shares, representing approximately 26% of current shares outstanding. As of Nov. 7, 2012, no common shares have been repurchased under the new plan. Since the fourth quarter of fiscal year 2010, JCTCF has repurchased 823,006 shares under prior formal plans of repurchase, reducing shares outstanding for JCTCF from approximately 2.4 million shares to 1.6 million shares, a reduction of almost 30%.

Conclusion

The share price of JCTCF rose from $10 in August to its current price of $12.5, a 25% increase matching the new share repurchase plan representing approximately 26% of current shares outstanding.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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