It began as a small pretzel bakery, but J & J Snack Foods Corp (JJSF, Financial) has now grown into a mid-cap corporation with sales of more than a billion and a market capitalization of $2.14 billion.
According to the company’s investor relations website, J & J describes itself as follows:
"[A] major player in the snack food industry with products spanning the frozen drinks category, frozen novelties category and baked goods categories...
Our principal products include SUPERPRETZEL, as well as internationally known ICEE and SLUSH PUPPIE frozen beverages, LUIGI’S Real Italian Ice, MINUTE MAID* frozen ices, WHOLE FRUIT sorbet and frozen fruit bars, SOUR PATCH KIDS** Flavored Ice Pops, Tio Pepe’s & CALIFORNIA CHURROS, and THE FUNNEL CAKE FACTORY funnel cakes and several bakery brands within DADDY RAY’S, COUNTRY HOME BAKERS and HILL & VALLEY.”
It also claims that its growth and success were due to its adherence to three basic principles: niche products, being a low-cost producer and dominating both the marketing and distribution channels.
It became an interesting stock for value investors when the share price plunged with the market earlier this year:
As the company explained in the Q2-2020 earnings release, “Approximately 2/3 of the Company’s sales are to venues and locations that have shut down or sharply curtailed their foodservice operations." So, it expects the pandemic to have a continuing negative influence on its operations and financials.
Still, at the end of the second quarter it had $267 million of cash and equivalents and does not expect any liquidity problems. It is nearly debt-free, which is also important in recessionary times.
Financial strength
J & J receives a near-perfect score from GuruFocus for financial strength:
Returning to the matter of debt, we see interest coverage is extremely high. From another perspective, look at the following 10-year chart of interest expenses. At first glance, the chart appears worrisome, yet a closer look reveals the values on the right side show negative numbers, indicating no interest expense at all:
At the bottom of the table, note that ROIC (return on invested capital) is much greater than its WACC (weighted average cost of capital). In other words, this company is generating profitable returns on the capital it has borrowed and received from investors.
Profitability
GuruFocus gives the company another robust score for profitability:
The GuruFocus system reports the company’s operating margins have declined, which gives a sever warning. Yet, the below charts of the operating and net margins to the end of J & J’s last fiscal year (ended Sept. 30, 2019) don’t seem as concerning, to me, as the margins are still high:
Valuation
With the below score for valuation, the company is in the middle of the range for its industry:
As the following one-year chart makes clear, J & J's stock price dropped considerably as Covid-19 took hold and the market went down:
Despite that fall, its price-earnings ratio is still above its 10-year median of 26.15. It is also overvalued based on the discounted cash flow (DCF) calculator:
- Share price (end of trading, July 22): $127.74
- Fair, or intrinsic, value according to DCF: $57.02
- Margin of safety (or lack thereof): -124.01%
Dividends
Despite a history of raising its dividend payments, J & J’s dividend yield is a modest 1.73%, and that’s with the stock price depressed. This chart shows the relationship between the share price and the dividend yield:
And this chart shows the historical trend of dividends per share:
The 3-year dividend growth rate, at 8.6%, indicates robust growth, as shown in the chart above.
The payout ratio, at 50%, suggests the dividend is sustainable and should not need to be reduced or eliminated, assuming the pandemic and economic crisis ease in the near future. Backstopping that conclusion is J & J’s free cash flow:
The forward dividend yield comes in a bit higher than the trailing 12-months yield, with an increase in payments from $2.00 annually to $2.30 annually.
The 5-year yield-on-cost indicates investors might expect an average annual return on dividends of 2.68%. That’s assuming they buy and hold for five years and that the company continues to grow its dividend payments at the same rate as during the past five years.
Judging by the past three years, investors should not expect any returns from share buybacks in the next few years. With a negative share buyback ratio of -0.4, it means the company has been issuing more new shares than it has been retiring. Over the past decade, the company substantially reduced its share count, but then pushed it back up again:
Gurus
This year, the gurus engaged with J & J have been selling more of the stock than they have been buying:
The three biggest positions are held by Jim Simons (Trades, Portfolio) of Renaissance Technologies with 330,450 shares, representing 1.75% of J & J’s shares outstanding. Mario Gabelli (Trades, Portfolio) of GAMCO Investors held 45,600 shares and Ken Fisher (Trades, Portfolio) of Fisher Asset Management held 8,758 shares. All positions are as reported at the close of the first quarter.
Conclusion
J & J Snack Foods’ founders and management have done a fine job building a little pretzel bakery into a mid-cap stock that has muscled out a significant place for itself in the consumer packaged goods industry.
Income investors looking for a stock that will pay the bills may check it out further if they have many years in which to invest, but those looking for income now or in the near future will want to look elsewhere, given J & J’s low dividend yield. Value investors may note the current price dip, but I would prefer to wait for an even deeper decline, as the stock still seems overvalued.
Disclosure: I do not own shares in any companies named in this article.
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