Jewett-Cameron Delivers Another Stellar Quarter

| About: Jewett-Cameron Trading (JCTCF)

Jewett-Cameron Trading Company Ltd. (NASDAQ:JCTCF) is a company with four distinct business segments. The individual businesses are as follows, with the corresponding sales mix and profit contribution over the course of the first six months of fiscal 2013:

  • JCLC manufactures and distributes specialty metal products and distributes wood products to retailers, mainly comprised of fencing, pet cages, and other pet products: 64% of sales, 86% of earnings
  • Greenwood processes and distributes specialty wood and other products to the marine and transportation industries: 17% of sales, 1% of earnings (industrial wood products)
  • JCSC processes and distributes agricultural seeds, mainly grass seeds: 15% of sales, 10% of earnings (seed processing and sales)
  • MSI imports and distributes pneumatic air tools, saw blades and specialty clamps. Some products have the Avenger Products label: 4% of sales, 4% of earnings (industrial tools)

These figures were calculated based on information reported in the 2013 second quarter report.

My first article on Jewett-Cameron called the company a buy on share repurchases, the balance sheet, and earnings. Since then the share price is up 44% in 7 months, as of the 4/15 close. My second article called for a higher share price, based on the continued strong earnings and strong balance sheet. The share price has risen around 11% in the six weeks since the article. I will once again call for a higher share price for Jewett-Cameron based on the stellar earnings report released on 4/15/2013 and an even stronger balance sheet.

Another Stellar Income Statement

For this article I will once again use the 39% tax rate I used in my previous writings to project what earnings would be, if one-time charges were not present. In this quarterly report, the company had a one-time gain from the sale of some land, while in the previous year's second quarter the company had a one-time gain from the reversal of litigation expenses. Neither of these items should be used to judge the company's potential future value to investors, but they do help strengthen the balance sheet.

Here is a table of the trailing four quarters sales and EPS performance for Jewett-Cameron, pulled from information in company press releases:

EPS EPS previous % change Sales % change
Q3 2012 $0.59 $0.30 97% 25%
Q4 2012 $0.45 $0.31 45% -4%
Q1 2013 $0.31 $0.03 933% 28%
Q2 2013 $0.38 $0.23 65% 20%
Trailing 12 months $1.73 $0.87 99% 17%

As one can see, earnings have improved markedly year over year. The weakest gain was a 45% increase in earnings on a 4% sales decline. Overall for the trailing twelve months the company increased earnings per share 99% on a 17% rise in sales.

The increase in earnings is due to three forces. First, the company has repurchased and canceled a large percentage of the shares outstanding over the course of the past two years. In the last six fiscal months the share repurchases have slowed to only 407 shares at $12 per share, likely due to a much higher share price. Second, the company has increased sales over the past twelve months. Third, the company has expanded margins. With roughly the same operating expenses and increased sales, the company has expanded operating margins from 4.4% in the first six months of 2012 to 7.4% during the same period in 2013.

Between these three forces, the company has managed to grow earnings per share 99%. The share repurchases are likely to remain slower with a higher share price, but the company is poised for both sales and margin increases going into the future. I project the company could easily grow earnings in excess of 20% in the next twelve months. With a trailing P/E of just over 10, from an earnings perspective the company is poised to see a higher share price over the next year.

The Strong Balance Sheet

One thing I look for in a solid company is a lack of long-term debt. In the latest 10-Q report, Jewett-Cameron carried only $50,000 in long-term debt, all in the form of deferred tax liabilities. Couple this with the following table pulled from the release, and one can see a company keeping good care of the balance sheet:

Weighted average diluted shares 1.57 million 1.57 million
Balance sheet items per share:
2/28/2013 8/31/2012
Current assets $12.11 $11.40
Total assets $13.64 $13.02
Total liabilities $1.70 $1.89
Stockholders' equity $11.94 $11.13

In the past six months the company has added $0.81 a share in equity, while increasing current assets and total assets. Additionally, total liabilities have declined. Another good part of this balance sheet is the lack of intangible assets, totaling a mere $0.26 per share out of $13.64 per share in total assets. In all, it would be hard to ask for a company to maintain a stronger balance sheet.

Accounts receivable may be one item on the balance sheet to direct a wary eye. The total now comes in at over $7 million, compared with under $4 million at the same time last year. On the bright side one can point to the higher sales volume directly resulting in higher receivables and higher cash in the future. However, cash is king and one must keep such a shift from cash to receivables in mind when looking at future reports. I myself would not be one to worry about the high receivables number after only one quarter of seeing the higher number, but if receivables were to grow without a corresponding increase in sales or persistently stay higher, I would be concerned. From the most recent quarterly report:

For the three months ended February 28, 2013, the accounts receivable collection period, or DSO, was 46 compared to 31 for the three months ended February 29, 2012...Inventory turnover for the three months ended February 28, 2013 was 44 days compared to 71 days for the three months ended February 29, 2012.

Clearly the company has a bit higher level of business, inventory is turning over faster, and receivables are higher. As long as receivables don't get drastically out of hand, the company will retain a solid balance sheet and continue to grow its working capital.

Valuing The Shares

I will again attempt to put some kind of range on where I think the shares should be trading, which again is higher than the current range. First, consider a year over year growth rate for the next twelve months of 20% on the bottom line, resulting in EPS of around $2.08 per share. For a company growing as well as Jewett-Cameron and with a good balance sheet, a P/E of 15 would not be unreasonably high. $2.08 X 15 = $31.20 per share. Going forward, assuming a moderate P/E and a much reduced growth rate, a price up to about $30-$31 a share would not put the shares in the range of "overvalued." Note, in my last evaluation I used a 10% growth rate, but after seeing the returns the company has made recently I expect a 20% or higher EPS growth rate this year.

Another method of valuation might be to use the company's current equity and add the next five years of earnings to the equity to see what the company may be worth in five years. I will assume a 20% growth rate for the next twelve months, followed by 10% for four years. This yields a reasonable value of $24.61 for the company.

If I was looking at an actual physical asset where I could buy it at $17.80 and be liquidated fairly reasonably at a value of $24.61 in five years, I would assume the asset a good buy. Of course there is much speculation in valuing the future potential of a company, but with a mild growth assumption I see no reason the company would not trade up to a value between $24 and $31 over the course of the next year. In that range, bears would be hard pressed to consider the company over valued and bulls might still have a case to buy or continue to hold. With strong earnings growth, good prospects, and a strong balance sheet, the case for continued advancement in Jewett-Cameron's share price has been made.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.