Shares of John Bean Technologies Corporation (NYSE:JBT) have seen a pullback this year, alongside the wider market. In the summer of 2021, I concluded that M&A had returned for this well-positioned and solid long-term value creator.
After being spun off from FMC more than a decade ago, John Bean has been operating under the radar, yet it has quickly built up a solid track record as a long-term value creator.
Since the spinoff, which took place around the time of the 2009 recession, John Bean shares have been trading rangebound between $10 and $20 per share, as shares rallied to the $100 mark in 2017. What followed were a few years of stagnation as shares rallied to a high of nearly $180 per share in November of last year. Ever since, shares have seen a violent selloff, having been cut in half as they are now trading at $85 per share.
Part of the long-term success comes from the positioning of the business, as John Bean is a combination of a larger FoodTech and a smaller AeroTech business. Ahead of the 2020 pandemic, the company posted flattish sales in 2019, with revenues up just a percent to $1.95 billion. Amidst flattish revenue trends, the company was able to grow operating margins by 220 basis points, to 9.7% of sales. GAAP earnings were posted at $4.02 per share, with adjusted earnings per share coming nearly a dollar higher at a couple of pennies shy of the $5 per share mark. The majority of this gap is the result of deal-related expenses, notably non-cash amortization charges.
With net debt reported at $660 million, leverage ratios came in at 2.3 times, which looked very reasonable, as the company initiated a $5.25 per share earnings outlook for 2020, which of course did not come to fruition following the outbreak of the pandemic. Notably, the aero segment was hurt by the global conditions at the time. As it turned out, 2020 sales fell 11% to $1.73 billion, with adjusted earnings down a dollar to $3.94 per share as well.
The company guided for 2021 earnings to rise in a modest fashion to $4.30-$4.55 per share as the company announced multiple smaller bolt-on acquisitions and a larger $170 million purchase of Prevenio last summer.
Pegging earnings power at $5.00-$5.50 per share under more normal conditions, a $130 price level in the summer of last year continued to mark a big premium over the market, all while leverage came in around 2 times. These valuations were too high for me, despite the defensive qualities of the business and its long-term track record.
Since shares traded at $130 in the summer of last year, shares did rise to near $180 by year-end, but by now have fallen more than 50% already, to $85 at the moment of writing.
In the meantime, the company has been active in pursuing bolt-on deals and to grow the business in an organic manner. In November of last year, John Bean acquired Spanish-based Urtasun Tecnología in a $40 million deal which added $25 million in revenues from fruit and vegetable processing solutions.
In February, John Bean announced its 2021 results with revenues up 8% to $1.87 billion, albeit that order growth was much more pronounced. Reported operating margins fell 80 basis points to 8.6% of sales after a softer start to the year, as adjusted earnings rose 9 pennies to $4.03 per share. The driver of the business remains the FoodTech segment, which is now responsible for $1.4 billion in sales, essentially three-quarters of total revenues, as the AeroTech business has seen a fall in full year sales to just below the half a billion mark.
Adjusted EBITDA of $252 million translates into a leverage ratio in the mid-2s, with net debt reported around $600 million. The company warned for the impact of labor constraints and supply chain issues in 2021, yet it guided for 2022 revenues to grow in the mid- to high-teens. After a softer first half (in terms of margins) the company expects to maintain full year margins or exceed them a bit, which implies that earnings growth should follow topline sales trends.
In April, JBT announced a 12% increase in first quarter sales to $469 million yet with operating margins down 250 basis points to 6.5% of sales, earnings have come down again. Nonetheless, the future looked a bit better as the backlog rose to $1.1 billion, which compares to just a $770 million number this time last year. Despite the softer start to the year, the company guided for full year adjusted earnings between $5.00 and $5.30 per share.
In July, JBT announced the purchase of German-based Alco-food-machines in a bolt-on deal which is set to add $35 million in revenues, to thereby add nearly 2% to pro forma sales, as this is truly a bolt-on deal which will not move the needle in a major way.
Late in the month, JBT announced second quarter sales up 14% to $542 million as operating margins were down 210 basis points to 7.8% of sales. With margin trends lagging compared to expectations, the company has cut the full year adjusted earnings guidance to a midpoint of $5.00 per share. Net debt remains stuck around $625 million, for a 2.5 times leverage ratio, on the back of continued bolt-on deal-making.
With 32 million shares now trading at $85, the market value has fallen to $2.7 billion, or $3.3 billion including net debt. This translates into a just over 1.5 times sales multiple and market multiple at around 16-17 times earnings. Of course, these valuations mark a huge decline from the peak valuation this time last year.
Alongside the second quarter results, JBT has announced a somewhat larger deal. The company reached a $290 million deal to acquire Bevcorp, a provider of beverage processing and packaging solutions. The purchase price is equal to about 8% of the own valuation but comes at a price. Even after deducting $35 million in tax benefits from the purchase price, a resulting $255 million price is equal to 3.2 times sales seen at $85 million and nearly 13 times EBITDA of $20 million. Pro forma net debt will jump to around $900 million, for a close to 3 times leverage ratio.
The issue is simply that this valuation is far richer than the valuation at which JBT itself trades, which begs the question of how price discovery has been working, and whether funds should have been earmarked for buybacks here. I would have opted for that route. After all, given the multiples paid and interest costs incurred, I see very little to no earnings per share accretion at first, and just around ten cents next year.
That being said, overall appeal looks enticing, as the business is now becoming so reliant on food, and hence I see a divestment of the aero business at some points down the road as a logical next move. With earnings power tending around $5 per share, the 17-times multiple looks reasonable, albeit that this deal for Bevcorp will result in quite some leverage here.
While no screaming appeal is seen here, the potential is there. This is certainly the case if margins can further recover to the low or mid-teens on a more than $2 billion revenue base. In such a scenario, there is real potential for earnings to improve to $6-$7 per share, albeit that this requires real execution and is far from a given.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.