J&J Snack Foods: Best in Class

BOSTON (TheStreet) -- J&J Snack Foods (JJSF) was founded in 1971 when Gerald Schreiber purchased the J&J Pretzel Co. for about $73,000 at a bankruptcy auction.

Schreiber rapidly expanded the company, securing a trademark for Superpretzel, now a staple at movie theaters, in 1973. Three years later, he had built a national distribution network for his soft pretzels and began acquiring competitors. The company grew steadily until 1985 when it went public on the Nasdaq. That same year, sales passed the $25 million mark. Fiscal 2010 sales are expected to hit $688 million.

In the food-products industry, J&J Snack is a best-in-class company. Focusing on the concession and frozen beverage markets, it has increased sales 6.5% annually since 2007 and boosted earnings per share by twice that amount. Its stock has fallen 10% in the past 12 months. Nevertheless, analysts are overwhelmingly bullish on its trajectory.

J&J Snack's fiscal third-quarter profit increased 6.2% to $15 million, or 85 cents a share, as revenue grew 5.5% to $190 million. The operating margin hovered at 14%. J&J Snack held $81 million of cash and just $310,000 of debt at the end of the quarter -- ample liquidity. The company has fuel on hand for acquisitions, share buybacks or a dividend boost. It currently pays an 11 cent quarterly distribution, equaling an annual yield of 1.1% with a safe payout ratio of 18%.

Schreiber is still actively involved in J&J Snack, serving as chairman and CEO. More pertinently, he is taking bigger bets on his company's future. Schreiber is J&J Snack's largest shareholder, holding 21% of the float. In the latest quarter, he added 41,450 shares to his position. In fact, four of the five biggest shareholders, including small-cap focused Royce & Associates and Neuberger Berman, recently boosted their stakes.

All six analysts evaluating the stock rank it "buy." A median target of $52.25 suggests a return of 34% in the next 12 months. Such upside is rare in traditionally slow-growth food-products stocks. Singular Research expects the stock to rise 54% to $60. Sidoti & Co. predicts a gain of 41% to $55. KeyBank ( KEY) forecasts a rise of 33% to $52. J&J Snack's stock trades at a forward earnings multiple of 14, a book value multiple of 2, a sales multiple of 1.1 and a cash flow multiple of 9.8 -- 8%, 53%, 27% and 20% discounts to food products averages.

Recent purchases of California Churros and Parrot Ice are likely to be accretive to 2010 earnings. The company has a record of modest acquisitions, boosting growth without compromising liquidity. California Churros generated $11 million of revenue in 2009. Management projects that Parrot Ice will add $2 million to fiscal 2010 sales. In the latest quarter, retail supermarkets were the fastest-growing division, with a sales gain of 14%. The food-services division increased sales 2.8% and the frozen-beverage unit grew sales 8%.

Though recent economic optimism bodes well for riskier cyclical stocks, J&J Snack is worthy of consideration as a value play. According to Zacks Investment Research, over the past five years, J&J Snack's stock has traded at a price-to-earnings ratio 23% higher than that of the S&P 500. Over a 10-year span, it has traded at a 2% premium. Currently, J&J Snack trades at a 20% discount to the S&P 500.

Management's recent purchases, an elevated net margin of 7% and $81 million of cash on hand are reassuring signs to investors. Also, if the economy weakens further, safe food-products stocks will garner attention. And J&J Snack is at the top of the heap.

-- Written by Jake Lynch in Boston.

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