If two of the country's most venerable food producers both announce similar deals on the same day, it is worth taking a close look. Of course, that is exactly what happened on December 28, when Campbell Soup (CBB) and Hershey (HSY) announced that they would acquire Snyder's-Lance (LNCE) and Amplify (BETR), respectively.
The deals represent an acknowledgement that snack foods are an increasingly large part of Americans' caloric intake. In 1977, just 12 percent of American adults consumed three or more snacks a day, and 41 percent of American adults reported eating no snacks at all. Today, the stats are inverted. Nearly 40 percent now consume three or more snacks per day, while a mere 10 percent eschew snacking entirely.
As this trend continues, shareholders of snack foods companies are poised to benefit. Here I discuss J&J Snack Foods (JJSF) and John B. Sanfilippo & Son (JBSS). As smaller players, JJSF and JBSS receive little attention from Wall Street. Both firms own quality brands and sport growing sales, robust balance sheets, and increasing profitability. In light of new consumer preferences and the strength of the businesses, these stocks are worth consideration.
J&J Snack Foods
J&J produces and distributes snack foods and frozen beverages marketed under a variety of brand names. The company is primarily known for its baked goods and frozen beverages/treats. Although these products definitely fall on the unhealthful side of the snack spectrum, well-known brands such as Icee, Luigi's Italian Ice, and Super Pretzel are not going away anytime soon.
In fact, J&J's growth remains robust, and the company has managed to increase revenue every year for an astonishing 45 consecutive years. Gerald Shreiber, 75, founded the company in 1971 and remains at the helm as CEO. Through his 20 ownership percent stake and three votes on the Board of Directors, Shreiber exercises a large degree of control over J&J.
Approximately 68 percent of sales stem from the food service category. That is, food purchased at venues such as sports stadiums, restaurants, movie theaters, and schools. Sales from beverage dispensers comprise 22 percent of total sales, with retail supermarket sales accounting for the remaining 9 percent. At 30 percent of sales, bakery items are the company's best-selling product, followed by frozen beverages and juices (26 percent), soft pretzels (20 percent), and churros (6 percent).
Shreiber is on record saying that he prefers to use cash for acquisitions, and J&J has made many over the years. Even after acquiring bakeries Hill & Valley and Labriola Baking Company within the last year, J&J still sits on $150 million in cash and virtually no long-term debt. J&J has consistently invested shareholder capital with ROI of about 12 percent annually. Shreiber sums up his business strategy as making niche products, being the low-cost producer, and expanding distribution channels.
At 35 times earnings, the stock does not come cheap, but investors pay for consistent and growing earnings, great brands, and terrific management. Given the earnings growth, though, I would feel more comfortable paying a multiple in the 20s - if I ever get the opportunity.
John B. Sanfilippo & Son
JBSS is one of the largest processors/distributors of nuts, selling its products primarily under the Fisher, Orchard Valley Harvest, and Sunshine Country brand names. The nut category accounts for 84 percent of sales, with the remainder comprised of other snack products such as peanut butter, ice cream and salad toppings, dried fruit, trail mix, and bulk food products distributed to wholesalers and commercial customers.
62 percent of the company's sales come from consumer products, with the other 38 percent split almost evenly between contract packaging and commercial ingredients. The three largest products are cashews/mixed nuts, pecans, and peanuts, which together made up 56 percent of sales in FY 2017. JBSS owns more than 1.7 million square feet of commercial and industrial property valued at $125 million on the books, or 17 percent of the company's present market value of $715 million.
With 75 percent control of the company's voting shares, the company is essentially run by the Sanfilippo family, which still plays an unusually active role at JBSS. Jeffrey Sanfilippo, 54, has served as CEO since 2006, while Jasper Sanfilippo works as Chief Operating Officer. Other Sanfilippo relatives fill the roles of Chief Financial Officer and Chief Information Officer.
That might be enough to give ordinary shareholders pause, but family-run companies statistically do better over the long run. Moreover, the company's performance speaks for itself. Sales have grown almost every year for the last 10 years, an impressive feat. The ever-increasing ROI, now at 14 percent, indicates that JBSS management is not running out of ways to invest shareholder capital. Long-term debt plus pension obligations sum to $53 million, a relatively small balance for a company that earns $60 million in operating income.
The company does not look overvalued at less than 20 times earnings, especially given its five-year average earnings growth of 15 percent and strong balance sheet. The company is well positioned to capitalize on the increasing popularity of nuts, which are now recognized as a nutritious snack packed with health benefits.
Disclosure: I/we 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.