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I enjoy finding smaller growth companies that manage to fly under most investors' radars, as they can often be a source of outperformance in the long term. However, finding such companies is only the first step, in order for them to be considered as viable investments going forward, these small companies must measure up to their competitors, the majority of which are usually larger and better entrenched.

One of these small companies in the Processed and Packaged Goods industry, J&J Snack Foods Corp. (NASDAQ:JJSF), has managed to grow despite constant and heavy competition from its mostly larger peers. Through consistent revenue and earnings per share growth and more recent and robust dividend-growth, J&J Snack Foods' impressive track record makes it a worthy consideration for long-term oriented investors.

About The Company:

J&J Snack Foods is a manufacturer, marketer and distributor of snack foods and beverages in the United States, Canada and Mexico. The company's more popular brands include the SuperPretzel line of assortments, Luigi's Real Italian Ice and Sherbet, Minute Maid Juice Bars and Frozen Lemonade, the Whole Fruit Sorbet line of frozen juice bars and Tio Pepe's Churros pastries.

Originally founded and incorporated in 1971 by current CEO Gerald B. Shreiber, the New Jersey-based company currently operates in three business segments; Food Service, Retail Supermarkets and Frozen Beverages. The company sells its products primarily through two main channels, the retail supermarket industry and the food service industry. Available in convenience stores, malls and shopping outlets, movie theatres, amusement parks and educational centers, J&J Snack Foods' niche snack foods and beverages appeal to consumers on both an increasingly popular brand name basis as well as a budget-friendly basis.

J&J Snack Foods' stock has performed exceptionally well for investors over the years, providing over 450% in total shareholder returns over the last decade alone, which is equal to an average annual stock return of 14.6% over the last ten years. Even in the last twelve months, JJSF has easily trounced the general indices, currently up over 40%, including dividends.

To best illustrate what has been driving these stellar gains in the stock, I will analyze the company from both a growth perspective and a dividend-growth perspective. As a growth stock, I will analyze JJSF based on four main criteria: chart, revenue/earnings per share growth, business fundamentals and valuation. As a dividend-growth stock, I will analyze the company based on both the number of dividend increases over time and the rate at which the company has been growing those dividends.

The Chart:

For any long-term growth investor, the chart is an extremely important indicator. Quite simply, a consistently upward trending chart indicates a viable growth story; anything else is cause for concern on the growth front. Let's first take a look at JJSF's five-year chart to ensure it is acting like a proper growth stock (included are 50-day, 100-day, 200-day moving averages):

(click to enlarge)

(Chart courtesy of Yahoo! Finance)

5-Year Total Return (all with dividends reinvested, numbers from YCharts.com):

JJSF: 199.1%

S&P 500: 36.19%

The five-year chart of J&J Snack Foods is very impressive and exactly what a growth investor needs to see over the long-term, a consistently steady uptrend. The stock has largely obeyed its moving averages, significantly breaching its 200-day MA only once since recovering from its financial crises lows in mid-2008. JJSF has also easily beaten the major indices over the last five years, providing an impressive total return of 199.1%, which is equal to an average annual stock return of 16.6%.

Let's take a look at JJSF's one-year chart to see more recent developments and patterns in the stock's trading. The following is a one-year chart of JJSF (included are 50-day, 100-day, 200-day moving averages as well as MACD and slow stochastic indicators):

(click to enlarge)

(Chart courtesy of Yahoo! Finance)

1-Year Total Return (all with dividends reinvested, numbers from YCharts.com):

JJSF: 43.75%

S&P 500: 15.74%

J&J Snack Foods' one-year chart is equally impressive, showing the same kind of strength that the stock's five-year chart displayed. Again, JJSF has largely obeyed all of its moving averages, dropping below the critical 200-day average only briefly in early 2012. Additionally, the MACD indicates very heavy buying and very little selling over the last year. Not surprisingly, JJSF beats the general indices fairy easily again, up over 43% in the last year compared to the S&P 500's total return of only 15.74%.

Growth:

To best illustrate J&J Snack Foods' growth, I have chosen to compare the company to competitors that operate in similar segments: Mondelez International, Inc. (NASDAQ:MDLZ), Snyder's-Lance, Inc. (NASDAQ:LNCE) and Inventure Foods, Inc. (NASDAQ:SNAK).

Company

JJSF**

LNCE

MDLZ

SNAK

Revenue Growth (2012)

11.66%

-1.22%

-2.21%

21.08%

Revenue Growth (2013)*

6.7%

10.4%

5.4%

9.1%

Revenue Growth (2014)*

3.8%

4.4%

6%

10.4%

Revenue Growth (3-Yr. Avg.)

7.38%

4.52%

3.06%

13.52%

EPS Growth (2012)

-2.39%

51.79%

-12.76%

-37.5%

EPS Growth (2013)*

14.7%

28.4%

12.9%

11.8%

EPS Growth (2014)*

7.6%

18%

12.1%

21.2%

EPS Growth (3-Yr. Avg.)

6.63%

32.73%

4.08%

-1.5%

(Numbers from Yahoo! Finance, MSN Money, as of 3/11/13)

* Indicates at least some numbers derived from projected analyst estimates in listed fiscal year.

* JJSF's fiscal year ends in September.

What the above table illustrates best is the relative consistency that J&J Snack Foods displays in its revenue and earnings per share growth. Although the company's most recent 3-year average revenue and EPS growth rates are not the best among peers, the company's results place it second with regards to both among all listed competitors.

In terms of revenue, JJSF's projected 3-year average growth rate of 7.38% places the company behind only Inventure Foods, which is projected to average a healthy 13.52% in revenue growth during the same time period. With regard to EPS, JJSF's 3-year average growth rate of 6.63% is second only to Snyder's-Lance's impressive average of 32.73%.

While clearly not projected to see robust growth going forward the next few years, JJSF is still projected to outperform the majority of its peers. Let's take a look at J&J Snack Foods' growth history for the last five years to see how these most recent projections compare.

Fiscal Year

Revenue

Change (%)

EPS

Change (%)

2007

568.9M

10.50%

1.69

7.64%

2008

629.36M

10.62%

1.47

-13.01%

2009

653.05M

3.76%

2.21

50.34%

2010

696.7M

6.68%

2.59

17.19%

2011

744.07M

6.79%

2.93

13.12%

Avg. 5-Yr. Growth Rate

N/A

7.67%

N/A

15.05%

(Numbers from Yahoo! Finance, MSN Money, as of 3/11/13)

With regards to revenue, although growth has declined from 2007-2008 levels in the more recent years, JJSF's 5-year average growth rate number of 7.67% is only slightly higher than the company's projected 3-year average (2012-2014) growth rate of 7.38%, indicating the company should come close to matching its past sales growth performance going forward.

Although the company's earnings per share growth has been more volatile, it has also been more robust over the last five years, with a 5-year average growth rate of 15.05%. This average number is significantly higher than the JJSF's projected 3-year average (2012-2014) EPS growth rate number of 6.63%, indicating the company is not expected to come close to matching its impressive earnings history over the next couple of years.

When the EPS history is adjusted to not take into account fiscal 2008 and 2009, the results of which distort the 5-year average EPS number a bit, JJSF's average growth rate becomes a more comparable but still higher 12.65%. Either way we analyze the earnings numbers, J&J Snack Foods is projected to experience a slowdown in EPS over the next few years.

Fundamentals:

Company

JJSF

LNCE

MDLZ

SNAK

Market Cap

1.34B

1.74B

50.82B

145.34M

Total Debt

599K

536.64M

19.49B

19.43M

Total Cash

81.19M

9.28M

4.58B

419.48K

2013 Projected Revenue*

886.17M

1.79B

36.65B

202.03M

ROIC

11.7%

4.1%

4.5%

7.9%

ROIC (5-Yr. Avg.)

11.2%

3.5%

3.2%

4.6%

P/E (TTM)

22.99

29.61

16.89

20.05

P/E (forward)

20.25

17.48

16.24

16.57

Net Profit Margin

6.93%

3.65%

8.65%

7.31%

Dividend/Yield

0.64/0.9%

0.64/2.5%

0.52/1.8%

NA/NA

(Numbers from Yahoo! Finance, MSN Money, as of 3/11/13)

* Indicates at least some numbers derived from projected analyst estimates in listed fiscal year.

J&J Snack Foods firmly takes the lead with regard to fundamentals as it first edges out all other companies in terms of debt. JJSF has the lowest amount of debt out of all listed companies in both absolute terms and in relation to market capitalization, as the company's $599 thousand in total debt is equal to only 0.04% of JJSF's current market cap of $1.34 billion. Additionally, J&J Snack Foods has an impressive amount of cash; at $81.18 million, it is equal to 6.05% of the company's current market cap.

J&J Snack Foods also leads all listed competitors in the all-important return on invested capital metric, which effectively measures how well a company invests in its own operations and generates returns off of those investments. With ROIC of 11.7%, JJSF is way ahead of all listed competitors, the next closest being SNAK with ROIC of 7.9%. What's even more impressive is that JJSF has been improving its return on invested capital as of late, as its current ROIC of 11.7% compares favorably to its 5-year average of 11.2%. This impressive 5-year average ROIC number also indicates that management at J&J Snack Foods has remained committed to providing above-average returns on capital investments throughout the years and should be able to continue this healthy trend going forward.

In terms of valuation, JJSF appears a bit expensive when compared to peers on both a trailing twelve-month basis and a future twelve-month basis. The company's current P/E of 22.99 is the second highest out of all listed companies and its forward P/E of 20.25 is the highest by far. When viewed historically, J&J Snack Foods appears expensive as well, as both its current and future P/E ratios are well above the company's 5-year average (2008-2012) P/E of 17.54.

A quick glance at the dividend/yield of J&J Snack Foods shows that the company is behind in this regard as well, as its current yearly payout of 0.64 per share is equal to only a 0.9% yield, which is far behind those of its competitors that offer dividends, LNCE and MDLZ. However, the more interesting story is in the growth of JJSF's dividend. Let's have a look:

Dividend-Growth:

Company

JJSF

Price Per Share

71.50

Dividend

0.64

Yield

0.9%

Payout Ratio

18%

Dividend Increases In Last 5 Years

6

% Increase In 5 Years

72.97%

Annual Dividend Growth (5-Yr.)

9.6%

Most Recent Dividend Raise

12/7/12

Most Recent Dividend Increase (%)

23.07%

(Numbers from Yahoo! Finance, Dividend-Stocks.com as of 3/11/13)

* Indicates dividend has been reduced in last 10 years

As the above table indicates, J&J Snack Foods has done very well increasing its dividend over time. In the last five years alone, the company has increased its dividend over 70%, which works out to be an annualized increase of just under 10% on average. Also important is that the company has remained very consistent in raising the dividend every year.

Additionally, the company's payout ratio is low, currently at 18%, which indicates the dividend is nowhere near in danger of being reduced. Most recently, JJSF increased its dividend a healthy 23% to 0.64, a yield of 0.9%.

While it is disappointing that JJSF's yield is not quite at the 1% threshold, historical yield data indicates that this is not the norm for the company. The current 0.9% yield on J&J Snack Foods is close to being the lowest for the company in the last five years. This is telling as it indicates stock appreciation has outpaced dividend growth in more recent years, which is not at all surprising considering the stock is up almost 200% in the last five years while dividend-growth is up 72.97%.

Growth Catalysts:

Founder and CEO Gerald B. Shreiber ended the company's latest conference call with what probably should have started it; the fact that J&J Snack Foods recorded its 165th straight quarter and 41st straight year of consecutive revenue increases, impressive feats to be sure! What the company has going for it now is momentum, the kind that management sees in many of its food product lines.

To start off, the company increased net sales by 11% in the most recently reported quarter (Q1 2013). Excluding sales derived from the company's recent acquisition of Kim and Scott's Gourmet Pretzels, J&J Snack Foods still managed to organically grow net sales 10% for the quarter.

This increase in sales was largely driven by robust growth in two of the company's core product lines; Tio Pepe's Churros line, which saw a 33% increase in sales, and the SoftPretzel line, which saw a 27% increase. The overall positive growth trends for these two brands are critical for JJSF going forward, as combined the two product lines accounted for 35.64% of the company's Food Service sales and 24.24% of the company's total consolidated sales in the latest quarter.

Management went into a bit more detail on these two product lines further on in the call, explaining that these latest growth numbers were not influenced by one or two large customer orders but were instead the result of years of patient strategies just starting to pay off and provide "traction for the next support levels" of growth. When questioned by analysts about the sustainability of both, CEO Shreiber stated that although he "could not in good conscious predict a continued double-digit increase in [the company's] core products" he nevertheless remains bullish on the core products as a whole and on the Tio Pepe's Churros and SoftPretzels lines in particular.

The company's Bakery Sales, which includes the Country Home Bakers, Mrs. GoodCookie and Readi-Bake product lines, grew an impressive 12% in the latest quarter. The Bakery portion of J&J Snack foods' business is especially important, as it accounted for well over half of all Food Service sales in the last quarter, or 35.68% of total consolidated sales. Also doing well is the company's Handheld business, which includes dough-enrobed product lines like Patio, Top Picks and Holly Ridge Bakery. This portion of business, which was acquired from ConAgra Foods Inc. (NYSE:CAG) in mid-2011, grew sales to $6.3 million from $5.8 million in the same quarter a year ago, an increase of 7%.

Management also touched briefly on the opportunities for growth in the quick service restaurant industry. CEO Shreiber explained that the company was 'under-penetrated" in the quick service/casual dining restaurant scene as of late and that recent advances into that segment were starting to prove beneficial and growth beginning to accelerate. This growth into traditional 'table-cloth' dining places will be lead by the J&J Snack Foods' core product brands (Tio Pepe's Churros and SoftPretzels in particular) and should help to further reinforce the individual brands going forward.

Another positive for J&J Snack Foods is the company's relatively effective control of costs recently. Total operating expense for the quarter fell 1.6% compared to the same quarter a year ago, while ingredient and packaging costs remained flat, which can also be seen as a positive example of management's control efforts as commodities like flour, used in many of J&J's bakery brands, have risen substantially since a year ago.

Finally, management explained that from July 25 to October 31, the company bought back 187,649 shares of its common stock for approximately $10.8 million, or a cumulative price of $57.60 per share. In addition to raising the dividend, the company's board also approved in November a further stock repurchase plan to buy back an additional 500,000 shares of common stock.

Risks:

Part of the risk with any food/beverage/service company is the ever-present threat of a downturn in consumer sentiment/spending, which would directly impact J&J Snack Foods' retail supermarket business in particular. The company experienced relatively soft sales (down less than 1%) in the latest quarter with regard to supermarket sales, partly attributable to bad weather and also due in part to an increase in the amount of coupon use by customers, which was up 4.22% from the same quarter a year ago. Although management stated that they believe this is a one-time occurrence it should serve as a reminder of just how sensitive a company like J&J Snack Foods is to consumer sentiment/spending and it will continue to be the main risk investors need to monitor going forward.

Another moderate risk is the combination of J&J Snack Foods' weakening earnings per share growth and the stock's rising P/E ratios. The company is trading at both a premium to its peers and a premium to where it has traded in the more recent past. With a slowdown in earnings growth likely ahead for the company, the stock's P/E ratios should more accurately reflect this particular challenge going forward.

Conclusion:

J&J Snack Foods has been a terrific performer over the last decade due to its unique combination of revenue and earnings per share growth and its rather robust dividend-growth. Despite fierce competition, management at J&J has successfully expanded the reach of the company's popular brand names over the last four decades through conservative business practices and strategic acquisitions. I believe that tradition is set to continue well into the future.

The company's past success with regards to revenue and earnings per share growth indicates that management understands the fine points of the business exceedingly well. Even though growth seems to be tempered in the near future, I believe J&J will continue to grow at solid rates and will continue to outperform the majority of its peers. Additionally, taking into account the company's very solid and consistent history of raising dividends and the current low payout ratio, I believe investors can count on increasing dividends every year from J&J Snack Foods.

My main concern is the company's current valuation, as it is a bit too expensive to justify right now based on the likely slowdown in EPS growth on the horizon. I recommend purchasing shares of JJSF on any significant pullback, particularly one that allows the forward P/E multiple to fall more in line with its historical average. If presented with proper valuation, investors should consider nibbling on some shares of J&J Snack Foods for the long-term.

Source: J&J Snack Foods: A Bite-Sized Company With Room To Grow