Jewett-Cameron Trading: a cannibal at fair value?

Jewett-Cameron Trading (JCTCF) ended on my research list after I noticed that they repurchased more than 10% of their outstanding shares in the latest quarter. This wasn’t the first time either that the company bought back stock: in the past five years the number of outstanding shares has dropped with more than 40%. Companies that aggressively repurchase their shares are in my opinion very interesting. It usually says something positive about the capital allocation and shareholder friendliness of the management team, and if it’s done below intrinsic value the share repurchases can create a lot of value. Before trying to figure out if this is also the case for Jewett-Cameron some numbers:

Last price (Jul 17, 2014): 9.29
Shares outstanding: 2,749,678
Market Cap: $25.5 million
Net cash: $4.2 million
P/B (mrq): 1.40
P/E (ttm): 10.88
EV/EBIT (ttm): 5.65

Valuation

Jewett-Cameron is a pretty straightforward business to understand. They operate four segments: industrial wood products; lawn, garden, pet and other; seed processing and sales, and industrial tools and clamps. The lawn, garden and pet segment is by far the biggest and accounts for almost 80% of revenue. The company writes in their latest 10-K that this segment is less sensitive to downturns in the US economy than the market for new home construction. While that might be true the company’s revenue dropped significantly in 2009 and has never really recovered since. But thanks to lower expenses operating profit is back to roughly the same levels as before. See the table below for some historical financials:

Historical financials Jewett-Cameron

The favorable impact of the shrinking share count is clearly visible when we look at earnings per share. Despite little progress in the business itself earnings per share have almost doubled compared to 2008. When we look at the development of the revenue numbers it’s also clear why the stock has been a poor performer for the past three quarters. Revenue is almost back to the 2009 level, and it now appears doubtful that this company can grow at a meaningful rate in the future.

Because of that I think the most appropriate valuation is to simply take the average operating profit from the past 5 years, apply the average tax rate, throw a 10x multiple on it and adjust for the cash held by the company. This generates the following picture:

Jewett-Cameron valuation

As is visible this valuation indicates that the company is trading at roughly fair value, and the implication is of course that the share repurchases aren’t generating an above average return on capital. It’s in my opinion still an excellent use of cash. Buying your own stock at a 10x multiple basically means that you are generating a 10% return on your money. That’s a lot better than having it linger in a bank account like so many other companies are doing.

Conclusion

Jewett-Cameron is a very interesting company, but unfortunately not very cheap and that significantly reduces the value that is created by buying back shares. Buying back fairly valued shares is in theory a neutral transaction, except that it is usually better than a lot of alternatives (hoarding cash, growth acquisitions and dividends depending on tax situation).

Luckily Jewett-Cameron is not expensive either, and at the current prices it will probably generate a fair return for shareholders. Perhaps that it could be a great idea when you have some specific opinion on how the housing market in the US will develop, and how that will impact Jewett-Cameron. But that’s not a prediction I want to make or can make, and since there is not much of a margin of safety at current prices I’m staying at the sidelines.

Disclosure

No position in Jewett-Cameron Trading at the time of writing.

7 thoughts on “Jewett-Cameron Trading: a cannibal at fair value?

  1. mike

    how do u screen for companies that do share buybacks consistently? Tried using bloomberg but it’s not a feasible approach. welcome any thoughts

    Reply
  2. LC

    Any insight onto what drives revenue? I mean, you can see the operational prowess that management has as they’ve increased both gross and operating margins over the time frame you have posted. The problem obviously is sales are not increasing.

    This could be interesting if you have any insight as to whether sales might rebound, in conjunction with stable (or even improving) margins.

    Reply
    1. Alpha Vulture Post author

      I think macro factors are playing a big role in demand for the companies products. When a new house is constructed there is someone who wants a new garden, a new fence and possibly new tools to do maintenance etc. At the same time I’m guessing that a lot of their products are a bit commodity like, and that consumers have plenty of choices. But don’t have any real insight, otherwise I might have had a position.

      Reply
  3. itwillfluctuate

    The reason their sales went down with the crisis is that their biggest business, wood distribution, was destroyed. They don’t make money off it anymore. Their margins changed because now they’re in a different business.

    Since their profits come almost completely form a new business that grew from nothing, I don’t think it makes much sense to take the average earnings of the past five years. I think that taking, say, the last two years makes more sense, or $3m after-tax. That’s worth $30m. Add cash of $4m and you get $34. So, if you buy today, you get a 24% discount.

    That’s what the company is worth in a bad scenario, where the lawn/garden/pet business stops growing, the wood distribution business never comes back, and the real estate where the seed business sits is never sold (the seed business breaks even and was acquired just because management thought the real estate was cheap).

    But management thinks the lawn/pet/garden business will keep growing nicely, both through new products and new markets. And they think they’ll eventually be able to sell the 12 acres (in an intersection) where the seed company sits for a good price.

    They have proved to be competent managers and capital allocators, and have the right incentives (almost like nowhere else), so it’s reasonable to take them seriously. So, I think there’s a good chance good things will happen, and even if they don’t, investors are very likely to still do OK as your post suggest.

    Reply
    1. Alpha Vulture Post author

      I only checked what happened with the various segments in the past two years and all segments showed declining revenue. So just a temporary hick-up for the lawn/pet/garden segment in your opinion? That could change the story of course.

      Reply
      1. itwillfluctuate

        Even if you only look at the past two years, it’s not a horrible picture: lawn/pet/garden revenue is a little bit down in the first nine months of fiscal 2014 (25.5m vs 26.7m in the first nine months of last year). The year before it grew from 29.8m in fiscal 2012 to 34.6m in fiscal 2013.

        I don’t know if the slight revenue decline of the past nine months is temporary, although management thinks so. If it is, investors will do very well. If it isn’t, they’ll likely still do OK.

        Reply

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