Value Investing

Nano-Cap Gem Jewett Cameron Flying Under The Radar

One of the cheapest stocks in our Small & Micro-CapDeep Value Stock Screener is, Jewett-Cameron Trading Company Ltd (NASDAQ:JCTCF). With a market cap of just $28 million most investors will never have heard of this small company based in North Plains, Oregon.

Jewett-Cameron operates through four segments, which include Industrial wood products; Lawn, garden, pet and other; Seed processing and sales, and Industrial tools and clamps. So, not very exciting stuff but they do it very well.

A quick look at the company’s share price history over the past twelve months shows that its share price is up 28% to $12.25, 18% off its 52 week high of $14.95 back in August 2016.

The company recently results its 2016 full year results dated November 2, 2016 with highlights including:

  • For the fiscal year ended August 31, 2016 Jewett-Cameron reported net income of $2.12 million, or $0.87 per share, on sales of $48.11 million compared to net income of $1.77 million, or $0.69 per share, on sales of $42.24 million reported for fiscal 2015
  • Sales for the fourth quarter of fiscal 2016 totaled $10.5 million compared to sales of $11.5 million for the fourth quarter of fiscal 2015. Net income was $552,164, or $0.23 per diluted share, compared to net income of $701,524, or $0.27 per diluted share, in the fourth quarter of fiscal 2015.

“The continued acceptance of several new products we introduced beginning in fiscal 2015 has had a positive effect on our sales and financial results” said CEO Don Boone. “We are also continuing construction of a warehouse expansion at our North Plains headquarters which will support the distribution of additional new products in the future”.

Growing Revenues

A quick look at the company’s annual income statements over past years (below) shows a very positive trend for Jewett-Cameron with revenue growth of 11.5% over the past 5 years, EBITDA growth of 17.2% over the past 5 years and operating income growth of 11.3% over the past 5 years. The company is also maintaining healthy gross margins around 20% and operating margins around 8%.

Annual Income Statement (values in 000’s)
Period Ending: 8/31/2016 8/31/2015 8/31/2014 8/31/2013
Total Revenue $48,111 $42,238 $42,340 $49,286
Gross Profit $9,737 $8,417 $8,378 $9,831
Operating Income $3,615 $2,924 $3,085 $4,674
Net Income $2,125 $1,774 $1,858 $3,132

(Source, Company reports, sec.gov)

What’s also noticeable is that net income per share rose from $0.87 per basic and diluted share, compared to net $0.69 per basic and diluted share, for fiscal 2015. The income per share was positively impacted by the repurchase and cancellation of common shares during both fiscal 2016 and 2015. The weighted number of shares outstanding was 2,435,650 in fiscal 2016 and 2,581,850 in fiscal 2015. This is good news for existing shareholders.

Operating expenses rose by $627,992 to $6.12 million in fiscal 2016 due to an increase in wages and employee benefits as the company made an additional 10% contribution to each eligible employee’s 401(k) plan as a one-time compensation bonus.

Industrial Wood Products – Greenwood

Sales at Greenwood in fiscal 2016 were $4.7 million, an increase of $31,305, or less than 1%, from sales of $4.67 million in fiscal 2015. Sales have begun to rebound as the company obtained new customers and new uses for its products, but due to the continued weakness in the marine industry, overall demand remains below historical levels. In February 2014, the company sold its excess inventory related to the marine industry in an arm’s length transaction and Jewett-Cameron has stated it maintains its readiness to participate in the marine segment when the market rebounds.

Lawn, Garden, Pet and Other – JCC

Sales at JCC were $39.28 million in fiscal 2016 compared to $32.90 million in fiscal 2015, an increase of $6.38 million, or 19%. Operating income at JCC for 2016 was $3.25 million compared to $2.11 million in 2015, an increase of $1.13 million, or 54%. The increase in sales for 2016 was primarily due to the market’s continued acceptance of recently introduced new products and the addition of new small and mid-sized customers. The results in fiscal 2015 were negatively affected by prolonged winter weather across the United States and the West Coast port slowdown which delayed the delivery of product from manufacturers in China. Overall, the operating results of JCC are seasonal with the first two quarters of the fiscal year being much slower than the final two quarters of the fiscal year.

Seed Processing and Sales – JCSC

Sales at JCSC were $2.92 million in fiscal 2016 compared to sales of $2.77 million in fiscal 2015, an increase of $150,852, or 5%. Although grass seed demand has risen in conjunction with the improvement in the US residential housing market, the sales environment for the segment remains challenging due to the decline in seed cleaning services as more growers clean in-house. Current supplies have also been restricted by the persistent drought in the Western US which have reduced harvested yields.

Industrial Tools and Clamps – MSI

Sales at MSI were $1.19 million in fiscal 2016 compared to sales of $1.88 million in fiscal 2015, a decrease of $691,247, or 37%. The segment has recently become more competitive, and the company reduced prices on certain products which reduced operating margins.

Strong Balance Sheet

A quick look at the company’s annual balance sheets over the past few years (below) shows that Jewett-Cameron has $4.5 million in cash and cash equivalents at August 31, 2016 and zero debt. With a market cap of $28 million and cash in excess of debt of $4.5 million that means Jewett-Cameron has an enterprise value of $23.5 million.

Annual Balance Sheet (values in 000’s)
Period Ending: 8/31/2016 8/31/2015 8/31/2014 8/31/2013
Current Assets
Cash and Cash Equivalents $4,520 $4,416 $4,328 $8,308
Total Current Assets $16,765 $17,203 $17,248 $21,047
Total Assets $19,870 $19,658 $19,692 $23,658
Current Liabilities
Short-Term Debt / Current Portion of Long-Term Debt $0 $0 $0 $0
Long-Term Debt $0 $0 $0 $0
Other Liabilities $0 $0 $0 $0
Total Liabilities $2,345 $2,134 $1,493 $3,060

(Source, Company reports, sec.gov)

What’s should also be noted is that the company had a decrease in working capital of $652,604 as of August 31, 2016. Changes to working capital included a decrease in accounts receivable of $346,043, a decrease in inventory of $282,558, and a decrease in prepaid income taxes of $25,974. Notes receivable also declined by $1,310 as the remaining balance of the note was repaid during the year.

These are the types of companies that we love at The Acquirer’s Multiple with plenty of cash on the balance sheet and zero debt.

Shareholder Friendly

A quick look at the company’s annual statement of cashflows over the past few years (below) shows Jewett-Cameron has generating loads of free cash flow. In the latest financial year (2016) the company generated $3.15 million in operating cashflows and had $926,000 in capex resulting in $2.22 million in free cash flow.

Annual Statement of Cashflow (values in 000’s)
Period Ending: 8/31/2016 8/31/2015 8/31/2014 8/31/2013
Net Income $2,125 $1,774 $1,858 $3,132
Net Cash Flow-Operating $3,149 $2,831 $382 $1,078
Capital Expenditures -$926 -$293 -$110 -$482
Sale and Purchase of Stock -$2,125 -$2,449 -$4,258 -$7
Net Borrowings $0 $0 $0 $0
Free Cash Flow $2,223 $2,538 $272 $596

(Source, Company reports, sec.gov)

With an enterprise value of $23.5 million and free cashflow of $2.22 million in FY 2016 that means Jewett-Cameron has a FCF/EV Yield of  9% (ttm). What’s also great news for shareholders is that the company continues to repurchase its shares which in turn helps boost earnings per share.

During Q4 2016 the company repurchased and cancelled a total of 112,152 common shares under its 10b5-1 share repurchase plan. The total cost was $1.379 million at an average price of $12.29.

During Q3 2016 the company repurchased and cancelled a total of 63,386 common shares under its 10b5-1 share repurchase plan. The total cost was $745,878 at an average price of $11.77 per share.

Jewett-Cameron has spent $2.125 million of its free cash flow in repurchasing its own shares in FY 2016 and Donald Boone, President and CEO, voluntarily returned 15,000 common shares to treasury for cancellation. The company paid no consideration for these shares.

With a market cap of $28 million and share repurchases of $2.125 million (ttm) that means the company has a buyback yield of 8% (ttm). One of the things we look at at The Acquirer’s Multiple is Total Shareholder Yield. Shareholder Yield is defined as Buyback Yield plus Dividend Yield. Most investors focus simply on Dividend Yield which is only half the picture. Total shareholder return needs to include BuyBack Yield.

Valuation

In terms of its valuation Jewett-Cameron is cheap. Its trading on a P/E of 15 and an Acquirer’s Multiple of 6.51. The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up.

* The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”

Jewett-Cameron is a great little nano-cap with growing revenues, a strong balance sheet and loads of free cash flow. The company is shareholder friendly with a shareholder yield of 8% and a continuing strategy of improving shareholder returns.

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