Summary
JJSF has risen nicely since the recession, buoyed by ever-expanding multiples.
The market even shrugged at a disappointing Q4 that capped off a rather weak fiscal 2018.
At some point, this story seems likely to give, with JJSF trading at 16x EBITDA and 40x FCF despite modest growth.
But that seemed to be the case for sometime - and yet JJSF trades not far from an all-time high.
For two years, I've been arguing that J&J Snack Foods (JJSF) is overvalued - and that there's not too much that investors can do about it. J&J isn't necessarily a bad business, to be sure. Founder Gerry Shreiber took a business acquired for $72,000 in 1971 and has turned into a diversified snack company now valued at $2.5 billion. Sales and profits still are growing. The balance sheet is clean, with dry powder for M&A. The core SoftPretzel and ICEE brands clearly have value.
But investors continue to pay ever-higher multiples for this very business - for reasons that long have seemed inexplicable. I posited last April that index buying might be a reason for the rising valuation - but that correlation has broken down (most notably amid the rout in the Russell 2000 that began in September). And at this point, I've gone from confused to flummoxed. J&J has posted two consecutive very disappointing quarters, with operating income declining 16% in fiscal Q4 (ending September), albeit with a comparison against a 14-week quarter. Revenue growth is below the company's own targets. Margins are compressing, with J&J struggling with the same labor and freight inflation as so many other U.S. manufacturers.
