- Soft Pretzels and frozen beverages gave J&J Snack Foods a boost.
- A rock solid balance sheet will help J&J Snack Foods self-finance product innovation, acquisitions, and operations during lean times.
- Investors can enjoy a solid dividend while waiting for capital gains.
On Nov. 6, snack food manufacturer J&J Snack Foods (NASDAQ: NASDAQ:JJSF) came out with its FY 2014 earnings announcement. The company had a robust year and fortified its already excellent fundamentals. Let's take a look to see what's going on with it.
Robust fundamental expansion
J&J Snack Foods saw its FY 2014 revenue, net income, and free cash flow increase 6%, 12%, and 33% respectively. Without acquisitions, revenue increases would still have been a respectable 4%. The company enjoys a diverse product portfolio selling snacks such as soft pretzels, frozen beverages, frozen snacks, and churros. The popularity of its soft pretzel products contributed 38.5% of its total revenue gain. Moreover, frozen juices, beverages and ice snacks in the food service and retail supermarket segments contributed to 33.6% of the overall revenue gain due in part to the acquisition of Philly Swirl in May 2014. Churros and handhelds served as a minor drag on revenue growth.
J&J Snack Foods' food service and retail supermarket segment contributed to the expansion in operating income which filtered down to net income. Its frozen beverage segment, which caters to machines in convenience stores selling frozen beverages such as the Icee brand, served as a slight drag on operating income growth due to lower gallons sold and extraordinary medical insurance claims.
J&J Snack Food's operating cash flow expanded 23% which overcame a miniscule 9% increase in capital expenditures. Sales of plant, property, and equipment also gained 31% and contributed to J&J Snack Foods' expansion in free cash flow for FY 2014.
Excellent balance sheet
J&J Snack Foods sports an excellent balance sheet. Its cash and investments equated to an incredible 40% of stockholder's equity at the end of fiscal year. Nearly 59% of this balance is comprised of marketable securities. This amount of liquidity should help the company through any difficult times as well as self-fund acquisitions, expansion, and product innovation. I love seeing companies with cash and liquid investments amounting to 20% of stockholder's equity or more.
Also, the company registered long-term obligations under capital leases which only amounted to 0.07% of stockholder's equity. Long-term debt creates interest costs which choke out profitability and cash flow. I prefer companies with long-term debt amounting to less than 50% and this company certainly fits the bill.
Very sustainable dividend
To add icing to the proverbial cake, J&J Snack Foods pays a very sustainable dividend. The best way to judge dividend sustainability is to gauge how much a company pays its shareholders vs. its free cash flow. I look for companies that pay out 50% or less of their free cash flow in dividends. J&J Snack Foods paid its shareholders $21 million last year equating to 30% of its free cash flow falling within my personal threshold. Currently, the company pays shareholders $1.28 per share per year yielding 1.2% annually.
J&J Snacks Foods has a lot going for it such as a diverse product line, healthy demand and a rock solid balance sheet. Also, investors can enjoy a healthy dividend while they wait for capital gains. Unfortunately, Mr. Market is also aware of how well the company is doing.
Currently, the company trades at a P/E ratio of 28 vs. 19 for the S&P 500 and 20 for its five year average meaning that it's overvalued. On a forward basis it's a little better, with J&J Snack Foods trading at a forward P/E ratio of 20 vs. 18 for the S&P 500 as a whole. However, given the solid fundamental foundation of J&J Snack Foods, investors may want buy a few shares while stepping up investment during market corrections.
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