John B Sanfilippo & Son (NASDAQ:JBSS) is a growing consumer packaged goods company trading at a significant discount - 6.5x EV/EBITDA and 7.5x EBITDA-capex. This opportunity exists due to a lack of appreciation for the recent restructurings that have transformed the business from a low margin processor with high commodity price exposure to a high return, branded CPG company with stable earnings. A lack of institutional coverage and limited management promotion also contribute to the price-value disconnect. JBSS is the third largest US packaged nut company and has the #1 market position in consumer baked nuts. JBSS is a growing, non-cyclical business that offers +75% upside with some near-term catalysts. At a point when very few deep value stocks exist, JBSS is uniquely attractive.
JBSS is a legacy family-run business that had historically been a low margin nut processor of the five major nut types (peanuts, pecans, cashews, walnuts and almonds) with disparate facilities spread across the US. The company was focused on volume growth rather than profits, product branding and returns. In 2009, JBSS upgraded management and subsequently closed uneconomical facilities, overhauled and centralized operations (consolidating from six plants to one Chicago facility), shifted away from commodity processing, rationalized purchasing discipline and improved working capital management. The majority of the operational restructurings that have taken place over the last four years are complete. The below statistics highlight this transition:
- Nearly tripled returns:
- ROE from 4.3% in FY2008 to 11.8% LTM
- ROIC from 7.9% in FY2008 to 18.2% LTM
- EBITDA/lbs sold from $0.12 in FY2008 to $0.27 in FY2013 (reported annually)
- EBITDA margin from 4.9% in FY2008 to 9.1% MRQ
- Inventory turns from 3.6x in FY2008 to 4.9x LTM
Most significantly, JBSS has focused the business and resources on growing its Fisher and Orchard Valley Harvest brands. It has been very successful in this endeavor - Fisher baked nuts has been growing at an average 20%+ per quarter for the last 12 quarters with a 50.2% volume increase in the last quarter. Formerly a Midwestern brand, Fisher is now sold nationally at Walmart, Target, Kroger, Kmart and others. The brand has doubled its market share over the last three years and recently surpassed Diamond to take the #1 Nielsen rank in its category with a +30% share. This has been driven by product innovation, sales and marketing investment, distribution gains and by capitalizing on competitor weakness (more below).
The company's Orchard Valley Harvest brand was overhauled in 2013 and is now sold nationally in the produce and fresh snack category. The growth of JBSS's brands is leading to higher margins, more pricing power and significantly less financial variability. In 2011, raw nut prices spiked over 100% (80% of JBSS COGS), yet JBSS was able to pass along these costs to retail within two months. This was an over $100M rise in raw materials costs that only resulted in a temporary $10M decline in EBITDA. The increased strength of its brands and more effective communication with customers has enabled JBSS to improve on this further. During the 30% raw nut price jump earlier this year, JBSS was able to pass the cost increase on in a matter of weeks, resulting in minimal margin impact.
Growth & Opportunity
As noted, Fisher baked nuts growth has been accelerating with an over 50% sales volume increase in the last quarter alone. The fallout at Diamond Foods (NASDAQ:DMND) has led to large reduction in its marketing spend, a 50% SKU reduction, lost customers and constrained access to raw nut supply. This continues to play in JBSS's favor and should lead to ongoing share gains. Meanwhile, the health benefits of nuts are driving demand and growth for the overall category. Fisher's recent momentum combined with Orchard Valley Harvest's ongoing expansion, positions it well to grow above market rates. JBSS continues to transition away from commercial end-markets toward higher margin consumer nut products (consumer now accounts for 67% of revenue versus 55% in 2009). This ongoing mix shift will lead to significant margin expansion. Consumer gross margins are 19-20% versus 7-10% for contract processing. If all the company's current revenue were derived from the consumer channel, EBITDA would be 50% higher.
The company has also improved its balance sheet and financial position (net debt/ EBITDA from 5.1x in FY2008 down to 1.6x LTM). This has enabled JBSS to return cash to shareholders in the form of a special dividend in each of the last two years. It is highly likely another such dividend for 2014 will be announced shortly.
Valuation & Catalysts
JBSS currently trades at 6.5x EV/EBITDA and 7.5x EBITDA-capex. CPG peers SNAK, DMND, RMCF, LNCE and BGS trade at 12x-16x EBITDA. At those multiples, JBSS would be worth $55-78 per share or 100-180% above the current share price. The growing snack and baked nuts categories have attracted increased M&A interest recently. In June, Flagstone Foods, which owns Ann's Nuts, was acquired by Treehouse Foods (NYSE:THS) for $1.3B or 24.3x EV/EBITDA and in December, PE-held Golden Boy was acquired by Post (NYSE:POST) for $320M or 1.2x revenue. The implied upside at these levels is obviously very large (4-5x the current stock price). The likelihood of a sale to larger food products company (KRFT, RAH, THS, etc.) is increasing with the age and reduced involvement of the family patriarch, Jeff Sanfilippo (82).
Absent any hard catalysts, shareholders are getting paid to wait through the 5.5% effective dividend and organic growth in the equity. 6.5x EV/EBITDA is a severe mispricing for a company with stable margins, attractive returns (20% ROIC), low economic sensitivity and an attractive growth profile with limited capital expenditures needed to support growth (operating at 60% of capacity). Deployment of excess cash flow into high returning branded business will continue to compound earnings at an attractive rate. This should result in meaningful upside to the stock as these dynamics become increasing apparent.
Disclosure: The author is long JBSS.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.