J&J Snack Foods: Still A Bad Taste

Summary

• J&J Snack Foods has moved lower recently, in spite of sales climbing and because of a worsening on its bottom line.
• The space the company operates in is large and growing, but this and the lower share price don't make it a good prospect.
• Given how pricey the shares are, the firm may have additional downside before it's worth considering.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

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Given current economic conditions, you might think that a good place to park your money would be a company dedicated to junk food. Normally, I think this would be the case. However, this only applies when the price being paid for the stock is appropriate. Buying any stock that looks overvalued can bring with it downside, no matter what industry it operates in. Such has been the case, in my opinion, with J&J Snack Foods (NASDAQ:JJSF), a business that's focused on the production and sale of snack foods like Auntie Anne’s, Brauhaus, Dippin’ Dots, and more. Over the past few months, shares of the business have declined, even as revenue continues to grow nicely. Bottom line performance has been a bit weak and it doesn't help that JJSF stock has been rather pricey. Now that shares have pulled back, though, it does make sense for investors to ask whether or not now might be a good time to buy in. Based on an assessment of where things are today, I still do believe that the company is too pricey for investors. And as such, I have decided to keep it rated the ‘sell’ I had it rated at previously.

Pain from mixed results

The last article that I wrote about J&J Snack Foods was published in the middle of December of last year. Leading up to that point, the company had demonstrated some rather mixed financial performance, with much of it tilting toward the bullish side. Sales growth was impressive and some of the cash flow data was looking up. On the whole, however, the 2022 fiscal year was rather lackluster. Add on top of all of this the fact that shares of the business looked to be rather lofty, and I had no problem rating it a ‘sell’, which is the rating I signed companies when I believe that they should underperform the broader market moving forward. Since then, the firm has done just that. While the S&P 500 is up 0.2%, shares of J&J Snack Foods have seen downside of 8.8%.

Author - SEC EDGAR Data

Really the only fundamental data that we have come out since the publication of that article to look at is data covering the first quarter of the company's 2023 fiscal year. During that time, revenue came in quite strong, totaling $351.3 million. That's 10.3% higher than the $318.5 million the company reported only one year earlier. About $13.4 million of the sales increase came from the company's recent acquisition of Dippin’ Dots, with the rest of the improvement being driven by growth across all three of its operating segments. The greatest growth came from the Food Service Segment, with revenue spiking 12.5%. The biggest growth here was under the frozen novelties category, with sales skyrocketing 157.4% from $8.5 million to $21.8 million. This seems to have been where the Dippin’ Dots contribution came from. The Retail Supermarket segment reported a very modest 0.9% sales increase year over year, while revenue growth under the Frozen Beverages category came in at 9.2%.

Unfortunately, the rise in revenue for the company did not bring with it improved profits. Net income was cut nearly in half from $11.1 million to $6.6 million. Much of this drop can be attributed to higher costs, including a 26.2% surge in distribution expenses and a 58.1% rise in administrative costs. Inflationary pressures associated with fuel and outbound freight were responsible for the pain associated with distribution. Meanwhile, administrative costs increased because of higher costs under that category from the Dippin’ Dots purchase. Surprisingly, despite the inflationary pressures seen elsewhere throughout the economy, the company managed to increase its gross profit margin from 24.9% to 25.9%. Pricing actions more than offset the roughly 20% surge that the company saw and the costs associated with products like eggs, meat, sugar, dairy, flour, and more. Other profitability metrics mostly followed suit. The one exception was operating cash flow. It actually rose from $5.5 million in the first quarter of 2022 to $21.4 million in the first quarter of this year. If we adjust for changes in working capital, however, we would have seen it fall from $24.2 million to $21.8 million. Meanwhile, EBITDA for the business fell from $27.5 million to $25.3 million.

Author - SEC EDGAR Data

Truth be told, it's still very early in the 2023 fiscal year to project out how much money J&J Snack Foods might actually make for the year. If we do take the easy approach and annualize data based on the first quarter, we would get net income of $28.1 million, adjusted operating cash flow of $103.5 million, and EBITDA totaling $114.2 million. Based on these figures, the company would be trading at a forward price-to-earnings multiple of 96.4. The forward price to adjusted operating cash flow multiple would come in at 26.2, while the forward EV to EBITDA multiple would be 24. As you can see in the chart above, these numbers are higher than if we were to use data from 2022, as well as higher than what the 2021 figures show. As part of my analysis, I compared the company with five similar enterprises. On a price-to-earnings basis, the four companies with a positive reading had multiples ranging between 5.8 and 127.9. Using the price to operating cash flow approach, the range was from 5.6 to 28.9. In both cases, three of the companies were cheaper than J&J Snack Foods. Meanwhile, using the EV to EBITDA approach, the range was between 3.3 and 32.4. Four of the five firms were cheaper than our prospect in this scenario.

Company	Price / Earnings	Price / Operating Cash Flow	EV / EBITDA
J&J Snack Foods	57.4	23.6	24.0
Cal-Maine Foods (CALM)	5.8	5.6	3.3
TreeHouse Foods (THS)	N/A	17.6	16.9
The Simply Good Foods Company (SMPL)	29.6	28.9	16.9
Utz Brands (UTZ)	127.9	27.7	32.4
Flowers Foods (FLO)	25.6	16.2	13.9

Click to enlarge

Some might be wondering about the bigger picture here. We do know that the economy is not exactly in the most stable state. Although jobs data and other economic data have been strong, persistently high inflation and rising interest rates create a great deal of uncertainty for investors. In general, however, the food market should be considered quite stable. After all, everybody needs to eat. As for the size of the market we are dealing with, it depends on where we focus and what our focus is on.

It's clear that J&J Snack Foods does focus on the snack food market. Globally, this market was estimated to be worth about $584.6 billion in 2022. By 2029, it's forecasted to climb to $838.6 billion, which translates to an annualized growth rate of 5.3%. Focusing on the US specifically since that is where J&J Snack Foods operates, the market is quite a bit smaller at $108.5 billion using estimates for this year. As a very mature market, it should come as no surprise that the growth rate here is much slower. By 2027, it's expected to grow to $120.6 billion, translating to an annualized growth rate of nearly 2.7%. If you look at something more specific like the soft pretzel category that comprises so much of J&J Snack Foods’ sales, you have a global market opportunity of about $4 billion that should grow to nearly $5 billion by 2028. Throughout North America, however, the market opportunity is around $1.7 billion, with forecasts of it expanding to $2.1 billion by 2028.

Takeaway

Fundamentally speaking, the picture for J&J Snack Foods has looked a bit messy. Sales continue to grow, but a rise in costs has been problematic. Due to this increased expense, profits and cash flows for the company have declined year over year. This might be tolerable if shares of the business were trading at cheap levels. But relative to similar firms, JJSF stock does look a bit pricey, while looking quite pricey on an absolute basis. Given these factors, I do still believe that the company warrants a ‘sell’ rating at this time.

Analyst’s 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.