John B. Sanfilippo & Sons (JBSS) Q2 Earnings: Large Dividend Yield, Robust Free Cash Flows

14x P/E, 6% Dividend Yield, 7% FCF Yield

John B. Sanfilippo & Sons (NASDAQ:JBSS) is a company with a long history in the nut industry, market leading brands, vertically integrated facilities, and consistent track record of growth. Added to this is steady dividend payment with a special dividend paid out in the last 4 years, and good free cash flow generation with a yield of 7.1% in FY06/21. With largely consumer facing food products, we see JBSS’s business as remaining relatively steady and expect to see 7.0% CAGR for EPS over the next four years. Supported by relatively inexpensive valuations, we believe that downside risk to JBSS’s stock price remains limited. The company’s valuation metrics for FY06/22 and FY06/23 P/E are 13.5x and 12.7x respectively. In addition, FCF yield for FY06/22 and FY06/22 stand at 7.2% and 8.3% respectively. Dividend yield for FY06/22 is expected at 6.3%. We value the company at a 22x FY 06/22 P/E, arriving at a target price of $126.00, a 60% upside from the current market price.

Higher costs hit profitability for 2Q22

JBSS reported a mixed set of 2Q22 results where revenue was up 8.4% YoY but net sales fell 33.4% YoY. 6.0% YoY growth in volume and 2.3% YoY jump in average selling price contributed to the topline increase. All three sales channels saw volumes increase with consumer distribution sales volume was up 2.2% YoY, commercial ingredient distribution sales volume jumped 27.1% YoY and packaging distribution volume growing by 11.4% YoY.

Gross profit margin however was down 200bps YoY because of manufacturing scheduling inefficiencies due to supply chain issues, and higher labor, freight and manufacturing supplies costs. Operating expenses also jumped by 35.9% YoY due to higher marketing, freight and payroll expenses. Overall, reported net income was down 33.4% YoY and EPS decreased 33.7% to $1.14. Looking ahead, management will look to align pricing action to cover the inflationary input cost pressure.

On their results conference call management indicated that they would complete all their pricing action by early 3Q22 which should offset the inflationary pressure they are seeing. They will also continue to monitor the situation and implement further pricing changes if needed. Additionally, the new branding strategy JBSS implemented showed an impact during the second quarter. Management is in the process of finalizing its long-term strategic vision to make JBSS a $2bn company and will share more details about this in the next few quarters.

Commenting on the results, JBSS CEO Jeffrey T. Sanfilippo –

I am pleased to report that we continue to deliver strong net sales and volume growth in this unprecedented operating environment. However, inefficiencies from supply chain issues, higher than anticipated inflationary input costs and labor shortages had a negative impact on our profitability as they outpaced our pricing actions in respect to timing. All our pricing actions are expected to be fully implemented by the early part of the third quarter which are intended to significantly offset inflationary input costs that we have incurred or expect to incur.

Conclusion

With largely consumer facing food products, we see JBSS’s business as remaining relatively steady and expect to see 7.0% CAGR for EPS over the next four years. Supported by relatively inexpensive valuations, we believe that downside risk to the stock price remains limited. We believe JBSS offers investors with an attractive risk reward profile given its inexpensive valuations, steady and defensive business, consistent free cash flow generation and regular dividend payments. We have a target price of $126.00 for the company which represents a 60% return potential.