Summary
- JJSF is one of the better-performing packaged food companies.
- The company has posted a mid-single-digit top-line growth while maintaining a zero debt capital structure.
- The management plans to spend a big pile of cash on M&A to increase shareholder value.
- The stock has rich valuations, but would be a decent dividend option below $140.
Packaged food companies are struggling to generate sustainable growth. The lackluster response to changing food preferences, evolving retail landscape, and intensifying competition from niche brands have negatively impacted the top- and bottom-line performance of many food companies in recent years. No surprise, the food products industry has posted a negative return of 7.7% over the past three years while the S&P 500 Index has rallied 40%.
J&J Snack Foods Corp. (JJSF) is one of the better-performing companies from the bunch. The company has managed to grow its revenues at a CAGR of 5% since FY14 without heavily relying on M&A while maintaining a zero debt capital structure, underpinned by increasing demand for soft pretzels and consolidation of the bakery business. With its well-diversified products portfolio, which includes a wide range of gluten-free, all-natural, whole grain and low-calories offering and a stash of cash ready for deployment, JJSF is well poised to generate value for shareholders. However, I would not recommend buying because JJSF is expensive at current price levels. Moreover, the declining trend in profit margins also fails to justify a high premium. But investors may consider buying the stock for growing dividends if the price falls below $140.
