Johnson Outdoors: Heightened Demand For Recreational Fishing Boosts Revenues

Summary

• Johnson Outdoors has seen a strong rise in net sales due to solid growth across its Fishing segment.
• Additionally, the company's liquidity position remains particularly impressive during COVID-19.
• I continue to see broad-based upside for the stock going forward.

Investment Thesis

Johnson Outdoors (NASDAQ:JOUT) is a financially strong company which has seen strong growth in revenue during COVID-19. Assuming earnings growth moderates to 10% per year going forward, the stock is still forecasted to have upside of 8% per year for the next five years. On this basis, I continue to see further upside for the stock going forward.

At a time when many stocks have been taking a hit due to the COVID-19 pandemic, Johnson Outdoors has not been one of them, with the stock price up sharply over the past year:

Source: investing.com

When looking at mobility across the United States for parks and outdoor spaces, we can see that mobility in the summer was much higher than the baseline even with COVID-19 continuing to be a concern:

Source: Our World in Data (Google Mobility Trends)

Recent Performance

With many indoor facilitates having closed in accordance with health guidelines - outdoor activities have made a resurgence in popularity and this is being reflected in higher demand for outdoor gear and equipment.

For instance, even with demand for outdoor activities moderating in the winter months, Johnson Outdoors still saw a strong increase in net sales for Q1 2021 compared to that of the previous year:

Source: Johnson Outdoors Q1 2021 Financial Results

The fishing segment proved particularly strong, with net sales up by 28 percent from the same period last year. While sales across the diving segment saw a decline due to pandemic-related restrictions, the impact was minor in the context of overall growth in net sales.

Source: Johnson Outdoors Q1 2021 Financial Results

Aside from the growth in revenue, the company's balance sheet is also particularly impressive. For instance, we see that Johnson Outdoors managed to significantly grow cash and cash equivalents by 42%, while also increasing inventories by over 10% to meet increased demand. The fact that the company is able to achieve this while incurring no debt is particularly impressive.

Source: Johnson Outdoors Q1 2021 Financial Results

From a financial standpoint, there is little doubt as to Johnson Outdoors' attractiveness as a company.

The main concern at this point is whether the stock has seen too quick a run-up during 2020 and could be set to moderate from here.

When looking at EV/EBITDA, the stock does not look particularly overvalued from an earnings standpoint. EV/EBITDA is trading at similar levels that we saw in 2018 and 2019, while EBITDA itself (earnings before interest and taxes) continues to rise in support of the higher stock price:

Source: ycharts.com

Looking Forward

In this regard, while we might see short-term consolidation in the stock on a technical basis, I continue to see a strong case for upside on the whole.

Of course, any stock comes with risks and Johnson Outdoors is no exception. It is reasonable to make the assumption that recreational fishing demand is artificially high at the moment due to COVID-19. Once mobility restrictions start to lift further and indoor facilities start to reopen once again - it is also reasonable to assume that recreational fishing demand will likely not be as high as it has been during this pandemic.

Moreover, given the economic ramifications of the pandemic - more and more people might find the costs of recreational fishing to be too high to justify going forward. For instance, Statista reports that the cost of fishing licenses continues to rise annually due to increased pressure on the stock.

Additionally, the cost of boats and fishing gear may also be prohibitive for some customers going forward - it is possible that the pandemic temporarily attracted a new cohort of customers who wished to take up recreational fishing as a new hobby during 2020. However, this heightened demand is likely to be temporary and we could expect to see sales revert to pre-2020 levels in the next 1-3 years.

Given that Johnson Outdoors is quite dependent on the fishing segment for overall growth in net sales - a decline in demand for this segment would put pressure on holistic revenue growth.

With that being said, should outdoor mobility trends for 2021 follow a similar pattern to that of last year, then it is plausible that we could still see vibrant growth for this segment as the year progresses.

Discounted Future Earnings

Source: ycharts.com

In an attempt to value the company on the basis of future earnings, I make the following assumptions:

• Growth in EPS will moderate to 10% per year, after having seen a higher than average growth in EPS of 23% in the past year.
• The discount rate is assumed to be 7% (as an assumed long-term rate of return on the S&P 500).
• The strong growth in sales and anticipated further upside will increase the terminal P/E ratio to 24x (which is just above levels seen in 2017 and 2018).

Source: Author's Calculations

The target price is reached by adding the projected discounted earnings over the next 5 years (33.51) to the product of the terminal P/E ratio and current diluted EPS (24 * 6.78), which yields $196.23.

Taking these assumptions, an estimated 5-year target price for the stock is $196, which represents a 41% upside from the current price, or just over 8% per year.

In this regard, even if one makes the assumption that earnings growth will moderate going forward, there is still a foundation for significantly further upside assuming 10% growth in earnings per year for the next five years.

Conclusion

Johnson Outdoors is a company that appears to have benefited strongly from the rise in outdoor recreational demand during the pandemic. Notwithstanding that we could see an eventual levelling out of sales growth across the Fishing segment, the company's financials are quite impressive. From this standpoint, I continue to see broad-based upside for the stock going forward.

Analyst’s 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.

Additional disclosure: This article is written on an "as is" basis and without warranty. The content represents my opinion only and in no way constitutes professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions.

Comments

[trailrunnr]

Thanks for the well-reasoned analysis of Johnson Outdoors, which isn't well known and is one of my favorite companies. I first bought it many years ago when I learned that it made the Eureka tent I own and is publicly held, even though the Johnson family owns most of it. The Johnsons once tried to take it private at about $20, but minority shareholders, including me, successfully objected. How did you happen to learn about it and write about it?

[Gtoz]

@trailrunnr I still have my Eureka backpacking tent that I bought around 1976-77. There were no 'eggrolls' back then, at least nothing light weight enough for my backpacking criteria. So it was on the hard ground with my wife. The tent was advanced for its time, with ripstop nylon, breathable upper and a fly, a vestibule, and tent poles that were sectionalized with stretch cord within. That was true camping, a tiny alcohol stove, freeze dried food, packing in wine in a plastic bottle and a few beers to put in a cold mountain stream upon campsite setup in a remote area. And climbing to the peaks which were always 'just a little bit further', a very contentious point with my wife. But she persevered.

[Investor Oliver]

@trailrunnr Do you perhaps know why did the shareholders object? And how likely do you think it is that they will try to take it private again?