Expanding ICEE And Dippin' Dots Into Theaters Will Align With Evolving Consumer Preferences

Key Takeaways

• Expanding theater and entertainment channels and Dippin' Dots launches align with consumer demand and offer new revenue growth opportunities.
  
• Efficiency gains from new distribution centers, pricing strategies, and stock repurchase aim to improve margins and enhance shareholder value.
  
• Declining margins, lost high-margin business, forex impacts, and volume dips in key segments challenge J&J Snack Foods' revenue and earnings stability.

Catalysts

Manufactures, markets, and distributes nutritional snack food and beverages to the food service and retail supermarket industries in the United States, Mexico, and Canada.

• Expanding operations in the theater and entertainment channels, especially through ICEE and Dippin' Dots, aligns J&J Snack Foods with evolving consumer preferences for experiences, driving revenue growth.
  
• The addition of three new regional distribution centers has significantly increased efficiency, reduced logistics costs, and improved on-time performance, which could lead to improved net margins.
  
• Incremental pricing actions have been implemented to mitigate input cost inflation, which should help to stabilize and potentially improve gross margins going forward.
  
• The launch and expansion of Dippin' Dots into the theater channel and retail markets represent new growth opportunities that are expected to contribute positively to revenue.
  
• A new $50 million stock repurchase authorization reflects confidence in the company’s long-term value, potentially boosting earnings per share as shares are repurchased.

J&J Snack Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming J&J Snack Foods's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 7.1% in 3 years time.
• Analysts expect earnings to reach $126.1 million (and earnings per share of $6.21) by about March 2028, up from $84.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.2x on those 2028 earnings, down from 32.2x today. This future PE is greater than the current PE for the US Food industry at 18.7x.
• Analysts expect the number of shares outstanding to grow by 0.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

J&J Snack Foods Future Earnings Per Share Growth

Risks

• The company experienced a decline in gross margin from 27.2% to 25.9% due to input cost inflation outpacing price increases, impacting net margins and earnings.
  
• Contraction in earnings per share from $0.37 to $0.26 and adjusted earnings per share from $0.52 to $0.33 indicates pressure on net earnings.
  
• Loss of high-margin seasonal bakery business due to bidding competition led to an unfavorable sales mix, affecting revenue stability and profitability.
  
• Foreign exchange headwinds, particularly a 20% peso depreciation, impacted the Frozen Beverage business in Mexico, negatively affecting revenue and earnings from international operations.
  
• Volume declines in key segments like churros due to the loss of limited-time offers pose risks to revenue and margin recovery if similar opportunities are not replicated.

Valuation

• The analysts have a consensus price target of $161.5 for J&J Snack Foods based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $175.0, and the most bearish reporting a price target of just $135.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $126.1 million, and it would be trading on a PE ratio of 29.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $139.42, the analyst price target of $161.5 is 13.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.