Jewett-Cameron Trading Company Ltd (JCTCF) is a company with four distinct business segments. The individual businesses are as follows, with the corresponding sales mix over the course of fiscal 2012:
- JCLC manufactures and distributes specialty metal products and distributes wood products to retailers: 65% of total sales (lawn, garden, pet and other)
- Greenwood processes and distributes specialty wood and other products to the marine and transportation industries: 17% (industrial wood products)
- JCSC processes and distributes agricultural seeds: 13% (seed processing and sales)
- MSI imports and distributes pneumatic air tools, saw blades and specialty clamps. Some products have the Avenger Products label: 6% (industrial tools)
These figures were calculated based on information reported in the 2012 annual report.
In my last article on Jewett-Cameron, I called the company a buy due to strong earnings growth, a strong balance sheet, and the past share repurchase program. Since then, the share price has risen from $12.38 to close today at $16.00 a share, a 29.2% gain. The purpose of this article is to update the financials of Jewett-Cameron and make the case the company deserves an even higher share price, due to its even stronger balance sheet and stronger earnings.
THE BALANCE SHEET
I mentioned before Jewett-Cameron has a nearly pristine balance sheet and this continues to hold true. The company registered $0 in long-term debt, $4.62 in cash per share, and a current ratio of 7.7. The following table presents a few more balance sheet items, with information extracted from the most recent quarterly report and the third quarter 2012 report, which I referenced in my last Jewett-Cameron article.
|Weighted average diluted shares||1.57 million||1.60 million|
|Balance sheet items per share:|
The balance sheet has improved quite a bit in just six months' time. Although current liabilities are up slightly, equity has risen 9.6% and the company remains long-term debt free. Another plus for the balance sheet is the fact intangible assets remain a small percentage of total assets, weighing in at only 2% in the latest quarter. I believe it's important to distinguish between intangible assets and tangible assets when evaluating a company, as real assets can be more easily sold and transferred than intangibles.
THE INCOME STATEMENT
The income statement is the second great thing about Jewett-Cameron, leading me to believe the company is due for a higher valuation. Both sales and earnings have grown in the trailing twelve months, as shown in the following table extracted from company press releases:
|EPS||EPS previous||% change||Sales % change|
|Trailing 12 months||$1.58||$0.89||78%||11%|
In the second quarter of 2012 the company had a reversal of litigation expenses due to a favorable court ruling. The actual number reported by the company was much higher than the one I show here. To come up with $0.23 per share, I subtracted the litigation reversal and assumed the company would be taxed at the 39% rate, which was the rate for the full year of 2012. I did this to represent a more clear picture of the actual operations of the company, instead of including the one-time gain. Although the $0.23 may not be the exact number the company would have come up with, this should be within plus or minus a few cents per share.
That said, the company reported some excellent earnings growth in the trailing twelve months along with an 11% increase in sales. In the first quarter press release, the CEO explains the increase in sales:
"The increase in sales for the quarter was due to successful sales efforts to increase market share of our existing products, as well as our recent introduction of new pet containment products," said CEO Done Boone.
Over the course of the last year the company introduced a new pet containment product and a new line of grass seed. Both of these have contributed to sales growth for the company. All in all, the company has some pretty strong trailing earnings, resulting in a PE of only 10. A lot of the EPS growth results from a declining share count, as the company aggressively bought back shares when the shares were at lower prices. Although there is no guarantee this will continue, the company has plenty of cash on hand and one might expect a continued emphasis on offering a return to share holders in the future.
VALUING THE SHARES
One way to do a conservative valuation of the company's shares would be to take the trailing twelve months earnings, assume a modest growth rate of 10%, and multiply by a reasonable PE of 15. With this in mind, we have $1.58 (1.1) (15) = $26.07 a share. A PE of 15 is not unreasonable when a company is growing earnings per share rapidly, growing sales, has plenty of cash on hand, has a current ratio of 7.7, and has no long-term debt.
Another conservative valuation method, with a long-term investment in mind, may be to take current equity and add to it the next five years of earnings, assuming the company has no earnings growth. With this we have $11.44 + 5($1.58) = $19.34 a share.
With either method, the company is way undervalued in my estimation. There are no alarms on the balance sheet, management believes in rewarding share holders, and the company is growing. I would like to posit a midpoint valuation between the two above numbers of $22.64 a share, or 41.5% higher than today's close of $16.00 a share.
After updating the financial statements and earnings tables for Jewett-Cameron, I am a bit sad I did not hold the shares I purchased last September. I did make a small profit on the trade, but clearly a longer-term hold would have been more prudent. Although I do not intend to buy any shares myself in the near term, due to a lack of funds, I hope I have made a clear case for current investors to continue to hold and potential investors to take a closer look at the prospects of the company. Whether or not $22.64 is a fair valuation of the company, I have no doubt the company should be valued higher than its current price of $16 a share.