Expanding Product Lines And Strategic Partnerships Fuel Optimistic Revenue And Margin Growth Outlook

Key Takeaways

• Enhancing manufacturing and distribution capabilities is expected to improve efficiency metrics, potentially increasing gross margins due to reduced costs and higher output.
  
• Broad-based sales growth, especially in handhelds and frozen novelties, driven by expanding product placements and new product introductions, signals potential for continued revenue expansion.
  
• Reliance on the movie theater sales channel, leadership transition, and inflation in key ingredients pose risks to revenue and margins amidst ambitious growth strategies.

Catalysts

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

• The enhancement of J&J Snack Foods' manufacturing and distribution capabilities is improving key efficiency metrics, which can increase gross margins. These improvements are noted across their supply chain strategy and operational investments, resulting in reduced costs and higher output metrics, which could positively impact product margins.
  
• The broad-based sales growth within the Retail segment, driven by expanding product placements with major mass merchants and growth across nearly all product categories, is expected to increase revenue. The substantial growth in handhelds sales (approximately 70%) and frozen novelties (11% increase) signal potential for continued revenue expansion.
  
• The introduction of new products and effective cross-selling strategies are expected to bolster revenue growth further. The mention of continued growth in churros with the third largest QSR and the rollout to additional grocery retailers under the SUPERPRETZEL and Auntie Anne's brands showcases potential for increased sales and market penetration.
  
• The anticipated recovery in theater sales driven by a strong lineup of movie releases in the latter half of calendar 2024 and into 2025 is likely to boost the Frozen Beverages segment, improving revenue. This optimism is anchored on the expected increase in box office and attendance trends which would directly benefit the sales of J&J's products in this channel.
  
• J&J Snack Foods' ongoing focus on product innovation and brand marketing, especially through summer promotions and the expansion of Dippin' Dots at AMC, Cinemark, and Marcus Theatres, should enhance brand visibility and drive volume growth, potentially impacting both revenue and net margins positively.

Assumptions

• Analysts are assuming J&J Snack Foods's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 9.0% in 3 years time.
• Analysts expect earnings to reach $157.1 million (and earnings per share of $8.3) by about September 2027, up from $87.3 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 27.5x on those 2027 earnings, down from 38.0x today. This future PE is greater than the current PE for the US Food industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 0.69% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The reliance on the movie theater channel for the sales of frozen beverages, soft pretzels, and churros could pose a risk to revenue, especially given the identified impact of approximately a 30% decline in theater attendance on sales in this segment.
  
• Production delays and the effect of the actors' strike impacting the film slate and in turn, the company's sales within the theater channel highlight a potential risk to revenue due to external factors affecting film release schedules.
  
• The pending retirement of CFO Ken Plunk by the end of the calendar year introduces uncertainty and potential risk related to the transition of leadership within the finance function, which could impact financial management and reporting.
  
• The mention of low to mid-single-digit inflation increases in the cost of key ingredients like cocoa/chocolate and sugar could strain gross margins if not effectively managed or if pricing adjustments cannot fully offset these cost increases.
  
• The company's ambitious growth strategies, such as expanding distribution across various customer channels and innovations within product lines, while promising, represent execution risk that could affect both revenue and net margins if not delivered as expected.

Valuation

• The analysts have a consensus price target of $192.25 for J&J Snack Foods based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.7 billion, earnings will come to $157.1 million, and it would be trading on a PE ratio of 27.5x, assuming you use a discount rate of 5.8%.
• Given the current share price of $170.85, the analyst's price target of $192.25 is 11.1% 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.