Stock Mart: J&J Snack Foods

Going shopping with a bargain hunter can be exhausting. Investing in a company whose CEO is a bargain hunter, however, can be considerably more lucrative.

J&J Snack Foods (JJSF Quote) has built a posse of profitable snack foods by acquiring niche-branded food companies at good prices and growing them to dominate their categories in supermarkets, ballparks, fast-food restaurants and school cafeterias. J&J's soft-pretzel business, which includes the Superpretzel brand, has about 70% market share, while its ICEE frozen carbonated drinks are now available in more than 90% of the country and are getting some extra fizz from a marketing and distribution agreement with Coca-Cola (KO Quote).

"They throw off a ton of cash and have made some good strategic acquisitions, which in turn have thrown off more cash," says Mitchell Pinheiro, an analyst with Janney Montgomery Scott, who rates J&J shares a buy. (His firm hasn't done any underwriting for the company.) "And almost all of their lines are pretty well protected from competition."

In February, J&J bought the Camden Creek Bakery cookie business, which had annual sales of $5 million. And it's not done yet. Gerald Shreiber, J&J's chairman and president, says he's still on the hunt for other good acquisitions. There's a "good chance" of a purchase by the early part of the company's next fiscal year, beginning in October. Shreiber says the company is looking into two or three possibilities now, one of which has annual revenue of as much as $125 million.

Even without any acquisitions, J&J shares look cheap, say analysts. "For a company that's had the type of growth they've had and is dominant in the soft-pretzel and frozen carbonated-drink market, they sell for an incredibly low P/E," says R. Bentley Offutt, an analyst with Offutt Securities in Hunt Valley, Md., whose firm hasn't done any underwriting for J&J. "The stock looks unusually cheap in comparison to specialty food companies."

J&J's shares have been held back by the general malaise of the food and small-cap sectors, as well as a relatively low corporate profile, analysts say. It's gotten a tad more exposure in the last few months, since it was recently added to the Russell 2000 index.

At Friday's closing price of 24 1/16, off 1/16, J&J trades at a P/E of 18.6 times trailing earnings. It also has a price-to-sales ratio of 0.78 and a price-to-book ratio of 1.8, both low.

"The company is selling at a significant discount to other food stocks," says Renie Knecht, who does equity analysis and helps manage funds at David L. Babson & Co., which holds 574,650 J&J shares, or about 6.3% of the company. The S&P Food Index, which includes larger branded food companies like Heinz (HNZ Quote), trades at about 23 times trailing earnings, according to data-tracker Baseline.

But analysts and investors say they've been impressed by how J&J has integrated and grown other product lines -- which, in addition to pretzels, include Tio Pepe's churros, Mama Tish's Italian ices and Funnel Cake Factory funnel cakes -- and say there's potential for more growth.

"They obviously know what they're doing," says Martin Whitman, manager of the (TAVFX Quote)Third Avenue Value fund, which owns about 328,000 shares, or 3.6%, of J&J. "They haven't had a down year and are very good about new products."

The prime example: ICEE, the slushy sweet staple of every good mall rat's diet. In December 1997, J&J acquired National ICEE, adding the brand's Eastern markets to its existing West Coast business. "With the national franchise they gained, they were able to open an enormous new client base that they haven't had before," says Offutt. ICEE now dominates the market for frozen carbonated beverages, competing only with Slurpee, which is sold in the 7-Eleven (SVEV Quote) string of convenience stores.

In February 1998, J&J and Coca-Cola signed an agreement to integrate marketing for ICEE and Coke brands. Following that agreement, Coke and Burger King began tests of the drinks, marketed under the Frozen Coke name, in restaurants around the country. Shreiber, the chairman, says Frozen Coke is available in between 2,200 and 2,300 Burger Kings, with "several hundred" being added each month. Earnings from the Burger King/Coke deal are small for now, but investors say they're expecting a future payoff.

"There's significant growth potential after the purchase of ICEE and the alliance with Coke," says Knecht at David L. Babson. The Coke agreement has potential to do more than increase ICEE sales. Shreiber and other investors (with his immediate family, Shreiber owns about a third of J&J shares) are hoping J&J can use Coke's marketing muscle to promote other J&J brands. The company is trying to boost the profile of its brands, supporting Superpretzels with a TV and billboard ad campaign. That pared second-quarter profitability, though net income still rose 58% in the quarter.

For the fiscal third quarter ended June 30, Shreiber says he's comfortable with "the northern part" of analysts' estimates, which he says range from 54 cents to 59 cents a share. (J&J consistently beats the First Call consensus.) Earnings are expected next week. For fiscal 1999, analysts expect earnings growth of 16.7%, slower than the 38% seen in fiscal 1998. But, says Janney Montgomery's Pinheiro, "There's value there."

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