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John B. Sanfilippo & Son: Tough Nut to Crack

February 08, 2013 | About:
Incorporated in 1979, John B. Sanfilippo & Son Inc. (JBSS) is one of the leading processors and distributors of tree nuts and peanuts in the U.S. that are sold under a variety of private brands and under the company’s Fisher, Orchard Valley Harvest and Sunshine Country brand names. JBSS also markets and distributes, and in most cases manufactures or processes, a diverse product line of food and snack products, including peanut butter, almond butter, candy and confection, natural snacks and trail mixes, sunflower seeds, dried fruit, corn snacks, sesame sticks and other sesame snack products under private labels and brand names.

Guru and Hedge Fund Insights

Royce & Associates LLC initiated a small position of 1,600 shares in JBSS in the fourth quarter of 2012; while Numeric Investors LLC, a quantitative hedge fund, sold 133,461 shares during the same period.

Valuation JBSS currently trades at a trailing twelve months P/E of 10.1 and a trailing 12 months EV/EBITDA of 3.8. Its current P/E valuations are at a 41% discount to its five-year average P/E of 17.1. The historical low P/E valuation is misleading, as JBSS' trailing 12 month net income is at a eight-year record high. In terms of asset-based valuations, its current P/B of 1.02 represents a 50% premium over its five-year average P/B of 0.68. JBSS achieved a trailing 12 months ROE of 10.5% and a five-year average ROE of 4.1%.

JBSS PE-ROE Comparison1360323311374.png

JBSS Historical Enterprise Value Multiples1360323439749.png

JBSS Historical P/B and P/NTA Multiples1360323533406.png

Since fiscal 2009, JBSS has delivered four consecutive years of profitability and positive free cash flow generation. The volatility of purchase prices for shelled walnuts and pecans and tree nut acquisition costs results in low gross margin stability.

JBSS Earnings-Cash Flow Comparison 1360323768122.png

JBSS Profit Margins Analysis1360323887477.png

Financial and Business RisksJBSS has a relatively strong balance sheet with a low gross debt-to-equity ratio of 27% and a net gearing of 20%. It has reduced total outstanding debt by 28% since 2008 and debt as a percentage of net sales is nearly half of its 2008 levels.

JBSS Cash-Debt-Market Capitalization Comparison

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JBSS is exposed to significant customer concentration risk, with its five largest customers representing approximately 56% and 53% of fiscal 2012 and 2011 sales, respectively. Of its five largest customers, Walmart Stores Inc. (WMT) and Target Corporation (TGT) accounted for 21% and 15% of JBSS's 2012 fiscal revenue.

High peanut prices may not be entirely positive for JBSS, as demand for peanuts is elastic. According to its fiscal 2012 10-K, JBSS believed that the reduction in sales volume during fiscal 2012 was caused primarily by a reduction in demand due to the higher prices of tree nuts and peanuts. It shows that even if JBSS is able to pass along any product price increase to its customers, it may ultimately reduce the demand for its products through reduced purchases or substitute products.

There are also corporate governance concerns with JBSS. The Sanfilippo Group and the Valentine Group own or control Common Stock and Class A Common Stock representing more than 75% of the voting interest in JBSS. In addition, certain members of the Sanfilippo Group that beneficially own a significant interest in JBSS have pledged a substantial portion of their Class A Stock to secure loans made to them by commercial banks. Also, key executive compensation of $5.37 million represented approximately 30% of JBSS' 2012 net income.

Business Quality and Capital Allocation

JBSS is one of the largest nut processors globally with fiscal 2012 annual sales in excess of $700 million and it is the North American market leader in every major selling channel from consumer and commercial ingredient customers to contract manufacturing and export customers.

JBSS has been shifting its company profile away from riskier commodity business to more value-added consumer business, with a focus on building its branded business, Fisher and Orchard Valley Harvest. FisherBaking is ranked second nationwide, while Fisher Snack is the Midwest market leader. On May 21, 2010, JBSS acquired certain assets of Orchard Valley Harvest Inc., a leading supplier of branded and private label nut and dried fruit products in the produce category, for $40.5 million allowed JBSS to expand its market presence into retail stores beyond its traditional nut products and broaden its product breadth and production capabilities.

JBSS has built a vertically integrated nut processing operation over the years that enabled it to control almost every step of the process, including procurement from growers, shelling, processing, packaging and marketing. It boosts of state-of-the-art nut processing capabilities, including possibly the single largest nut processing facility in the world and is an expert in procurement with buyers averaging over more than 20 years of experience. JBSS' Illinois, Georgia, California, North Carolina and Texas production facilities and distribution facilities located in various other states across the country, enables JBSS to ship to nearby customer distribution centers/divisions, resulting in faster reaction time and lower shipping costs.

JBSS' export distribution channel currently accounts for only 5% of its net sales. It has recently completed a China market entry study with an international consulting firm; any successful and profitable entry into emerging markets such as China will be a huge boost for JBSS.

JBSS does not pay a regular dividend. However, on Dec. 10, 2012, JBSS announced that its Board of Directors declared a special cash dividend of $1.00 per share payable on Dec. 28, 2012. It took the opportunity to return profits to shareholders through this special cash dividend on the back of a profitable fiscal 2012.

Conclusion

The lack of a regular dividend policy, coupled with corporate governance concerns, will keep me away from this stock.

DisclosureThe 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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