Sunday, February 23, 2020

A Current AIM Small Cap Equity Holding: John B Sanfilippo & Son Inc. (JBSS, $79.74): “In a Nutshell, Hold JBSS”

John B Sanfilippo & Son Inc. (JBSS, $79.74): “In a Nutshell, Hold JBSS”
By: Luca Cardamone, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


John B Sanfilippo & Son Inc. (NASDAQ: JBSS, $79.74) John B Sanfilippo & Sons Inc. is one of the leading distributors of raw and processed nuts, and dried fruit. The company also markets, other snack items such as trail mixes, candy, nut butter, and yogurt/chocolate coated products. The company sells under the brands of Orchard Valley Harvest, Squirrel Brand, Fisher, Sunshine Country, and other private brands. The NASDAQ listed company distributes its products to retailers, warehouses and distribution centers, both domestically and internationally. Besides, JBSS reaches its customers through the following channels: Consumer, Commercial Ingredients, and Contract Packaging. The company was founded in 1922 and is headquartered in Elgin, IL.

• JBSS operates through vertical integration which allows the company to have direct control over the various stages of supply-chain. Furthermore, this structure helps the company to have supervision over the quality of its products.

• JBSS has an on-site R&D test kitchen, where the team can create, test and tweak products all on the same day. Thanks to the company’s investments in equipment and technology JBSS is one of the leading innovators in the nut business.

• JBSS has to deal with cost volatility for raw nuts which can impact the sales as raw and processed nuts account for nearly 80% of the company’s sales.

• JBSS is reducing natural gas, and electricity usage while also being involved in a robust recycling program that reuses approximately 80% of the company’s waste stream.

Key points: 

John B Sanfilippo & Sons Inc. is one of the leading distributors of nuts and other snack products. Snacking is a growing industry that has a revenue of about $42.6B. Nuts and seeds, represent 32.2% of that revenue. Demand for nuts and seeds has been growing during the past years as consumers have shifted their interest over healthier snacking options. JBSS is doing a good job with enhancing its products offering with plant protein snacks, and other snacks that support healthier consumption trends which can represent profitable introductions.

The company disposes of a strong financial position that has allowed JBSS to reward the shareholder with special dividends. Regular dividends have also been constantly increasing since 2017 when they were first paid to both Common Stock and Class A Stock. For this year the company declared a special dividend of $2.40 per share and a regular dividend of $0.60 which represents a 9.09% increase since last year. In the past several years the company has always been able to award its shareholders with a special dividend varied bases on the amount of free cash flow available.

JBSS has five facilities that are strategically located in nut growing regions. The facilities are equipped with the latest technologies and have enough capacity to handle the aforementioned operations. On October 7, 2019, the company experienced a fire in the North Carolina facility, located in Garysburg. No person was injured but the fire caused the destruction of equipment and caused JBSS to contract with a third party to meet the production requirements. The company currently plans to permanently cease all operations at this facility after the current shelling is over which is estimated to take approximately sixteen months. This event did not have repercussions on the stock price as after the accident the stock reached all times highs.

The company is working on expanding its reach. JBSS is doing so by promoting its products in airports, fitness centers, hotels and by building a strong social media presence through influencers. JBSS has also expanded its branded portfolio on Amazon which allows them to have an eCommerce presence. In my opinion, this is something that in the future will be very important for the company as people’s shopping habits are slowly changing and moving towards digital channels.

What has the stock done lately?

JBSS was incorporated into the AIM small-cap equity fund on April 20th, 2018. The stock was purchased at a price of $58.33 and since then it increased to $77.18 surpassing the estimated price target of $70.49. Since its addition, JBSS contributed to the small-cap portfolio with a 32.3% upside. After reaching an all-time high of $107.86 in November 2019 the stock sank 27%. This is mainly due to insiders selling. The COO, Jasper Sanfilippo, sold in a single transaction $923k worth of shares at a price of US$98.15 each. The stock is currently trading at $79.74.

Past Year Performance: 

Since last year, JBSS has increased ~10% in value. Net sales have decreased by 12.7 million, or 1.4%. This was mainly driven by customer shift in buying lower-priced nuts instead of higher-priced ones. This was offset by an increase in sales volume that allowed gross profit and diluted earnings to grow by respectively 18.1% and 21.8 %. During the past year, the company’s strong financial position allowed to pay $29.1 million worth of cash dividends.

Source: FactSet
My Takeaway

With the stock relying on the variable price of the nuts, I believe that the stock can be threatened by a future increase in the rise of the crops.  Besides, the stock heavily depends on a few customers: Walmart accounts for one-third of the sales while Target accounts for about 10%. A possible rupture in one of these connections might affect the company ability to keep increasing margins. I believe that the recent drop in stock price reflects these risks and the insider selling might be the sign of a lack of confidence in the company. However, I think that the stock has shown what is capable of, and I believe that the company’s strong brand portfolio and good recognition are going to help JBSS to reach its previous 52-weeks high. In addition, the strong financial position, allowing to pay special dividends and increasing regular dividends are reasons why I rate this stock a hold.

Source: FactSet