Rating Update: Stock Rating C-High Neutral (11/8/19)-J & J Snack Foods Corp (JJSF).

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BUSINESS

J&J Snack Foods Corp. manufactures, markets, and distributes various nutritional snack foods and beverages to the food service and retail supermarket industries in the United States, Mexico, and Canada. The company operates through three segments: Food Service, Retail Supermarkets, and Frozen Beverages. It offers soft pretzels under the SUPERPRETZEL, PRETZEL FILLERS, PRETZELFILS, GOURMET TWISTS, MR. TWISTER, SOFT PRETZEL BITES, SOFTSTIX, SOFT PRETZEL BUNS, TEXAS TWIST, BAVARIAN BAKERY, NEW YORK PRETZEL, KIM & SCOTT’S GOURMET PRETZELS, SERIOUSLY TWISTED!, BRAUHAUS, AUNTIE ANNE’S, and LABRIOLA brand names, as well as under the private labels.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, JJSF is expected to continue to be a Value Builder.

J & J Snack Foods has a current Value Trend Rating of C (High Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. J & J Snack Foods has a poor Appreciation Score of 22 but a very high Power Rating of 97, and the High Neutral Value Trend Rating results.

J & J Snack Foods’ stock is selling well above targeted value. The current stock price of $180.93 compares to targeted value 12 months forward of $133.
J & J Snack Foods’ low appreciation potential results in an appreciation score of 22 (78% of the universe has greater appreciation potential.)
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J & J Snack Foods has a Power Rating of 97. (JJSF’s very high Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 3% of companies in the universe.)
Factors contributing to this very high Power Rating include: is in an extremely strong phase current; recent price action has been extremely favorable; and the recent trend in JJSF’s earnings estimates has been favorable.

INVESTMENT PROFILE

JJSF’s financial strength is high. Financial strength rating is 85.
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Relative to the S&P 500 Composite, J & J Snack Foods Corp has neutral Growth/Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that JJSF is lower risk. Relative weaknesses include: low forecasted profitability, and low expected growth. JJSF’s valuation is high: low dividend yield, high P/E ratio, and moderate price/book ratio. JJSF has unusually low market capitalization.

CURRENT SIGNALS

J & J Snack Foods’ current operations are stable. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.

J & J Snack Foods’ current technical position is very strong. The stock price is in a 41.8 month up move. The stock has appreciated 93.5% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Significant negative changes in investment behavior have recently occurred for J & J Snack Foods Corp (NASDAQ: JJSF): its shorter term price trend turned down.
The stock is currently rated C.
J & J Snack Foods Corp (NASDAQ: JJSF) stock closed at $0.14 on 11/8/19 after a major increase of 55.6%. This advance was accompanied by normal trading volume. The stock has declined -5.2% during the last week but has been exceptionally strong relative to the market over the last nine months.

CASH FLOW

In 2018, J & J Snack Foods experienced a significant decline in cash of -$17.5 million (-12%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$157.2 million. Non-operating sources contributed +$7.4 million (+5% of EBITDA). Cash taxes consumed -$24.9 million (-16% of EBITDA). Re-investment in the business amounted to -$130.2 million (-83% of EBITDA). On a net basis, debt investors pulled out -$0.2 million (-0% of EBITDA) while equity investors withdrew -$26.8 million (-17% of EBITDA).
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J & J Snack Foods’ Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the J & J Snack Foods Corp Peer Group as well. In most years, J & J Snack Foods was in the top quartile. Currently, J & J Snack Foods is upper quartile at +5% of EBITDA (+$7.4 million).

J & J Snack Foods’ Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the J & J Snack Foods Corp Peer Group as well. (Since 2015 Cash Taxes, %EBITDA has experienced very sharp improvement.) In most years, J & J Snack Foods was in the third quartile. Currently, J & J Snack Foods is below median at -16% of EBITDA (-$24.9 million).

J & J Snack Foods’ Business Re-investment, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the J & J Snack Foods Corp Peer Group. (Since 2015 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, J & J Snack Foods was in the third quartile and second quartile. Currently, J & J Snack Foods is below median at -83% of EBITDA (-$130.2 million).

J & J Snack Foods’ Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the J & J Snack Foods Corp Peer Group. In most years, J & J Snack Foods was in the second quartile and third quartile. Currently, J & J Snack Foods is below median at -0% of EBITDA (-$0.2 million).

J & J Snack Foods’ Equity Investors, %EBITDA has experienced a minor downtrend over the period. This downtrend was accompanied by a similar trend for the J & J Snack Foods Corp Peer Group. (Since 2016 Equity Investors, %EBITDA has experienced a sharp recovery.) In most years, J & J Snack Foods was in the third quartile and top quartile. Currently, J & J Snack Foods is slightly above median at -17% of EBITDA (-$26.8 million).

J & J Snack Foods’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the J & J Snack Foods Corp Peer Group. (Since 2015 Change in Cash, %EBITDA has accelerated very sharply.) In most years, J & J Snack Foods was in the top quartile and lower quartile. Currently, J & J Snack Foods is lower quartile at -11% of EBITDA (-$17.5 million).
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J & J Snack Foods’ Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the J & J Snack Foods Corp Peer Group as well. In most years, J & J Snack Foods was in the top quartile. Currently, J & J Snack Foods is at the upper quartile at +12%.

PROFITABILITY

J & J Snack Foods’ return on equity reached a new post-2009 low in 2018.
This was due to minor negative trend in pretax operating return and small positive trend in non-operating factors.
The productivity of J & J Snack Foods’ assets declined over the full period 2009-2019: asset turnover has experienced a minor downtrend.
Non-operating factors (income taxes and financial leverage) had a minor positive influence on return on equity.
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J & J Snack Foods’ return on equity is at the lower quartile (11.4%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is above median (12.8%) reflecting asset turnover that is above median (1.18X) and above median pretax margin (10.8%).
Tax “keep” rate (income tax management) is at the lower quartile (72.5%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is lower quartile (1.23X).

GROWTH RATES

There are no significant differences between J & J Snack Foods’ longer term growth and growth in recent years.
J & J Snack Foods’ historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 6.0% per year.

Total asset growth has been 8.2% per year.

Annual E.P.S. growth has been 8.5% per year.

Equity growth has been 8.6% per year.
No consensus growth rate forecast is available for J & J Snack Foods.
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Relative to the J & J Snack Foods Corp Peer Group, J & J Snack Foods’ historical growth measures are erratic. Equity growth (8.6%) has been at the upper quartile. Total asset growth (8.2%) has been at the upper quartile. Revenue growth (6.0%) has been slightly above median. E.P.S. growth (8.5%) has been at median.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, J & J Snack Foods’ stock price performance has been quite good. Between January, 2009 and November, 2019, J & J Snack Foods’ stock price rose +418%; relative to the market, this was a +38% gain. Significant price moves during the period: 1) April, 2016 – September, 2019: +90%; and 2) August, 2010 – October, 2015: +225%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 23.7% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through October, 2019 of 23.7% is at the upper quartile relative to J & J Snack Foods Corp Peer Group.

Current 5-year total return performance of 14.6% is above median relative to the S&P 500 Composite.
Through October, 2019, with above median current 5-year total return of 14.6% relative to S&P 500 Composite, J & J Snack Foods’ total return performance is at median relative to J & J Snack Foods Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, JJSF’s overall valuation is quite high. The highest factor, the ratio of enterprise value/assets, is upper quartile. Price/earnings ratio is upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Price/equity ratio is above median. The lowest factor, the ratio of enterprise value/revenue, is below median.

Relative to J & J Snack Foods Corp Peer Group, JJSF’s overall valuation is exceptionally high. Four of five factors are lower quartile. The highest factor is the ratio of enterprise value/assets, followed by the ratio of enterprise value/revenue, then by the price/earnings ratio, then by the ratio of enterprise value/earnings before interest and taxes. The lowest factor, price/equity ratio, is at the upper quartile.
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J & J Snack Foods has a major value gap compared to the median valuation. For JJSF to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 2.73X to 1.57X. If JJSF’s ratio of enterprise value/revenue were to fall to 1.57X, its stock price would be lower by $-73 to $108.
For JJSF to fall to lower quartile valuation relative to the J & J Snack Foods Corp Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 2.73X to 1.32X. If JJSF’s ratio of enterprise value/revenue were to fall to 1.32X, its stock price would decline by $-88 from the current level of $181.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, JJSF is expected to continue to be a Value Builder.
J & J Snack Foods’ current Price Target of $130 represents a -28% change from the current price of $180.93.
J & J Snack Foods’ low appreciation potential results in an appreciation score of 22 (78% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 22, the high Power Rating of 97 results in an Value Trend Rating of C.
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J & J Snack Foods’ current Price Target is $130 (+27% from the 2018 Target of $103 but -28% from the 11/08/19 price of $180.93). This rise in the Target is the result of a +18% increase in the equity base and a +8% increase in the price/equity multiple. The forecasted increase in cost of equity has a large negative impact on the price/equity multiple and the forecasted decline in return on equity has a slight negative impact as well. More than offsetting these Drivers, the forecasted increase in growth has a very large positive impact.
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PTR’s return on equity forecast is 11.2% — in line with our recent forecasts. Forecasted return on equity erratic but little changed between 2010 and 2018. The current forecast is steady at the 2010 peak of 12%.

PTR’s growth forecast is 16.0% — substantially above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well above the 2012 peak of 9%.

PTR’s cost of equity forecast is 7.8% — in line with recent levels. Forecasted cost of equity erratic but little changed between 2010 and 2018. The current forecast is steady at the 2010 low of 7.1%.
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At J & J Snack Foods’ current price of $180.93, investors are placing a positive value of $97 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 7.0% per year, and a return on equity of 11.9% versus a cost of equity of 7.2%.
PTR’s 2020 Price Target of $130 is based on these forecasts and reflects an estimated value of existing assets of $81 and a value of future investments of $49.

About John Lafferty 52821 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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