Jewett-Cameron Trading Company Ltd (JCTCF) is a company with four business segments operating in four distinctly different markets. Although the company was incorporated in Canada, the current headquarters are in Oregon and there are no significant company assets located in Canada. The parent company owns a subsidiary, which itself has three subsidiaries; a bit confusing, but not out of the ordinary. The individual businesses are as follows, with the corresponding sales mix over the previous nine months ended May 31, 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: 16% (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 3rd quarter 2012 SEC filing, which I will use for most of the analysis in this article.
I like this company for a long idea due to its strong earnings per share growth, strong balance sheet, and the aggressive share repurchase and cancellation program.
The Income Statement
Jewett-Cameron has had a lot of ups and downs in earnings over the past few years. The company's products are very sensitive to the overall economy, especially the home improvement market with 65% of trailing nine months sales coming from lawn, garden, and pet products, which the company describes as fencing, landscape timbers, a proprietary gate support system, dog kennels, and greenhouses. These items are directly related to the desire of consumers to support their pets and improve their homes. In the last year or so the segment has been improving nicely along with the general market for housing and home improvement. The following table outlines the last several quarters of earnings and sales:
|Year over year comparisons|
|EPS||EPS previous||% change||Sales % change|
|1st Quarter 2010||$0.03||$0.12||-75%||-32%|
|2nd Quarter 2010||$0.09||$0.11||-18%||-18%|
|3rd Quarter 2010||$0.33||$0.20||65%||9%|
|4th Quarter 2010||$0.38||$0.23||65%||33%|
|1st Quarter 2011||($0.37)||$0.03||loss||-17%|
|2nd Quarter 2011||$0.21||$0.09||133%||55%|
|3rd Quarter 2011||$0.28||$0.33||-15%||3%|
|4th Quarter 2011||$0.32||$0.38||-16%||-20%|
|1st Quarter 2012||$0.03||($0.37)||vs loss||19%|
|2nd Quarter 2012||$0.70||$0.21||233%||-1%|
|3rd Quarter 2012||$0.56||$0.28||100%||25%|
The first glaring issue is the $0.37 loss in the first quarter of 2011. Upon review, the loss was due to a charge taken for litigation purposes, which was reversed in the second quarter of 2012 after the Oregon Supreme Court found in favor of Jackson-Cameron. As of the most recent quarterly report, the company is clear of any litigation either for or against the company, so these charges are now behind the company, with no additional charges on the immediate horizon.
After a few years of up and down earnings, the company has emerged in the last nine months with strong sales and earnings growth, resulting in $1.61 of trailing twelve month earnings (including the reversal of the litigation charges). Income from operations for the past nine months grew 27.8% and for the three months grew 50.3%. Both of these are a truer representation of the underlying business, without the distortions of the litigation. The company explains a big chunk of the gains as a result of "staycations." Consumers are choosing more often to stay at home during their vacation time and improve their homes and the lives of their pets, versus going on expensive trips. This is consistent with the reports from other companies in the home improvement segment, which are generally seeing strong sales and earnings growth. I expect these trends to continue, as consumers see real value in improving their existing homes versus the old rush to flip a house every so many years.
The last component making current and future EPS desirable for Jewett-Cameron is the substantial and ongoing share buyback program, which will be discussed later.
The Balance Sheet
The next item I focus on after the income statement is a company's balance sheet. The five general categories of a balance sheet are current assets, total assets, current liabilities, total liabilities, and equity. For Jewett-Cameron, the absolute values can be misleading, with current assets, total assets, current liabilities, and equity all decreasing over the last nine months. However, as I will discuss later, the company has been aggressively buying back shares, so a proper analysis should focus on a per share basis. The following table breaks down the numbers per share:
|Weighted average diluted shares||1.60 million||2.00 million|
|Balance sheet items per share:|
|May 31, 2012||August 31, 2011|
|Current assets||$ 10.36||$ 9.02|
|Total assets||$ 11.85||$ 10.28|
|Current liabilities||$ 1.41||$ 1.54|
|Stockholder's Equity||$ 10.44||$ 8.73|
As one can see, per share, current assets are up, total assets are up, and stockholder's equity is up, while current liabilities per share are down. The company had no long-term debt for either reporting period. Each of these items make up a strong balance sheet, especially the lack of long-term debt and very minimal current liabilities. In fact, the company was recently trading for less than equity per share, a very good sign for holders of the shares and potential buyers.
Another important point from the balance sheet is the quality of the assets. Many companies have a lot of "assets" wrapped up in intangible items, such as goodwill, patents, and customer relationships. Jewett-Cameron has only $0.46 per share in assets in the intangible category, which mainly consists of a patent the company has been amortizing, and only $1.76 per share in property, plant, and equipment. The company has 87.5% of assets in the current assets category. Combined with very minimal current liabilities and no long-term debt, these items make the company extremely liquid. Which brings me to my next point for Jewett-Cameron.
Company Share Repurchases
Since May 25, 2010, the company has authorized six share repurchase programs. The following table represents the actual shares repurchased under these plans, as reported in the most recent quarterly SEC filing:
|Shares repurchased||Average price||Total cost|
|4th quarter 2010||79,040||$ 6.95||$ 549,328.00|
|1st quarter 2011||297,072||$ 8.25||$2,450,844.00|
|3rd quarter 2011||95,908||$ 9.50||$ 911,126.00|
|4th quarter 2011||10,500||$ 9.35||$ 98,175.00|
|1st quarter 2012||50,000||$ 9.08||$ 454,000.00|
|2nd quarter 2012||248,587||$ 9.01||$2,239,768.87|
|3rd quarter 2012||41,899||$ 9.13||$ 382,537.87|
In my opinion, there is no better use of excess cash for a company than to repurchase and cancel shares. Repurchasing shares reduces the supply of shares on the market and increases the earnings per share of the remaining shares. As mentioned earlier, despite a decrease in total current assets, total assets, and stockholder's equity, the amount of each category per share has actually increased in the previous nine months, due to an aggressive share repurchase and cancellation program.
On August 17th, 2012, the company announced its latest repurchase program of 400,000 shares. In this press release, the company justifies the program by saying:
"The share repurchase program was approved by the Company's Board of Directors as part of its ongoing consideration of alternative ways to leverage the Company's strong cash position. The Board of Directors believes that a share repurchase program at this time is in the best interests of the Company and its shareholders, and will not impact the Company's ability to execute its growth plans. "
I thoroughly agree with this statement. The company has plenty of cash, plenty of current assets, and no long-term debt. Between earnings and the healthy balance sheet, the company has enough cash on hand to fund future growth plans, while still being able to afford an aggressive share repurchase program. I have no doubt the company will continue to purchase shares in the current quarter, as well as future quarters, though I will caution readers the company is not likely to repurchase the full 400,000 shares authorized under the program. As each preceding share repurchase program has expired, the board has approved a new one. This bodes well for existing and future shareholders.
The company also mentioned in the third quarter SEC filing that it is exploring delisting from the Toronto Stock Exchange and trading solely on the Nasdaq, something which would save the company a little money in fees associated with this listing.
Conclusion And Thoughts On The Future
As I have demonstrated in this article, Jewett-Cameron currently has a strong rate of growth in both the top and bottom line. The balance sheet is nearly as pristine as any I can find, offering room for growth and, most importantly, the share repurchase program. With the share repurchases, the company can have flat year over year net income, but still grow earnings per share.
The company's business prospects are currently bright. The lawn, garden, and pet category has shown strong top-line growth of 18% year over year during the last 9 months. The industrial tools segment has seen 42% growth. The seed segment has shown 12% growth and the company announced a new grass seed retail program in March. The one declining segment has been the industrial wood products segment with a 6% decline in sales, due to a still soft marine products market. With the majority of the business showing growth in the first nine months of the year, one could expect a positive result in coming quarters.
Speaking of coming quarters, the company has yet to report fiscal year end 2012 earnings. The company has traditionally reported earnings during the first few weeks of November and I see no reason for this to change. As I submit this article I currently have a bid in to buy some shares in anticipation of a run up before earnings and will update in the comments if I should indeed purchase shares. I believe Jewett-Cameron is undervalued, has strong growth potential, and is a steal at current prices, especially with the company competing to buy shares.
Good luck investing everyone!