On Jan. 26, snack and food manufacturer J&J Snack Foods (NASDAQ: NASDAQ:JJSF) came out with its Q1 FY 2015 earnings announcement. The company didn't do so well fundamentally in my opinion. However, it's just one quarter. J&J Snack Foods sells many well-known products such as Icee, Slush Puppie, Luigi, Superpretzel and The Funnel Cake Factory. I doubt it's going anywhere anytime soon. Let's take a look and see what is going on with this company.
In the most recent quarter J&J Snack Foods saw its revenue increase 4.5% year-over-year. The acquisition of Philly Swirl contributed 1% to the overall sales gain. The organic portion of the revenue came from increased demand for its bakery products within the foodservice segment and increased pretzel demand within all food segments. Also, increased demand for beverages, machines and the need to repair them within the frozen beverage segment contributed to the overall gain in revenue. Customers demonstrated a desire for these products. A long-term shareholder would want to own shares in a company that sells products that are in demand.
Net income decreased
J&J Snack Foods saw its net income decrease 9.4% as growth in operating expenses outpaced the growth in revenue. Some of these expenses are temporary in nature. The company closed down a manufacturing facility in California. This sounds like a one-time event. Incremental expenses stemming from the Philly Swirl operation also contributed to increases in expenses. I'm sure the company will crack down on operating costs. The company also incurred advertising expenses pertaining to the new Superpretzel Bavarian. If demand takes off for this product then the company investment in advertising will pay off.
Free cash flow declined
J&J Snack Foods also saw its free cash flow decline 35% year-over-year. Unfavorable changes in assets and liabilities, especially inventory, accounts payable and accrued liabilities, put a dent in operating cash flow causing it to decline 20%. Moreover, the company increased its capital expenditures 17% year-over-year.
Excellent balance sheet
J&J Snack Foods possesses an excellent balance sheet which is a rarity these days. The company has $226 million in cash and liquid investments which equates to a whopping 40% of stockholder's equity. I like to see companies with cash and investments equating to 20% or more of stockholder's equity. The company has no long-term debt which represents a good thing. Long-term debt creates interest which chokes out profitability and cash flow. I like to see companies with long-term debt amounting to 50% or less of stockholder's equity.
Dividend is sustainable
I like to gauge dividend sustainability based on how much a company pays out in dividends relative to its free cash flow and prefer companies that pay out less than 50% of their free cash flow retaining the rest for other uses. In the most recent quarter, J&J Snack Foods paid out 41% of its free cash flow in dividends making it pretty sustainable. Hopefully, the free cash flow situation will be better for the full year as seasonal fluctuations iron themselves out. Last year, J&J Snack Foods paid out 30% of its free cash flow in dividends. It currently pays shareholders $1.44 per share per year and yields 1.5% annually.
It looks like the expansion in expenses is temporary and one time. I also like the company's rock solid balance sheet. Its huge cash and investments balance should help the company self-finance acquisitions and operations during a downturn. As of this writing the company's shares are down roughly 14% giving the company a P/E ratio of 26 vs. the 30 it has fetched in recent times. This represents a good time to buy shares.