Jewett-Cameron (JCTCF): A Stock That Grew in Value Even When the Business Didn’t Grow in Size
Over the last 10 years or so, Jewett-Cameron (JCTCF) has roughly quintupled its stock price while the company’s total revenue has remained basically the same.
There are some interesting signs here. But, I haven’t learned enough to say anything definitive about this company.
I can summarize what we know from the SEC filings though.
Jewett-Cameron is an illiquid microcap. The company files with the SEC. In fact, it also files with SEDAR (because it’s incorporated in Canada and used to trade on the Toronto Stock Exchange). Today, Jewett-Cameron is listed only on NASDAQ. And, although incorporated in Canada, it’s really an American company.
The business description for Jewett-Cameron describes the company as being involved in industrial wood products, products tied to pets and garden and lawn, and seed and seed processing. Older descriptions of the company also mentioned a discontinued industrial tool business (it was liquidated last year). I think these are somewhat misleading descriptions of the company. They give the impression this is more of a lumber business and more of a diversified business than it really is.
I don’t know a lot (yet) about the long-term history of this company. But, based on the dates given for when each business segment was created – it seems it started out as more of a lumber business and gradually moved further and further into what I think it is today: a pet, garden, and lawn business with the “pet” part (dog kennels, fencing to keep dogs enclosed, etc.) being the most important. No segment other than “pet, garden, and lawn” consistently contributes meaningful profits to the company. In fact, in recent years, this company would have earned about 10 cents per share more if it consisted only of the “pet, garden, and lawn” business.
So, over 100% of the EBIT you are seeing here is from “pet, garden, and lawn”. Also, the majority of sales in that segment (like 70%) are for metal products rather than wood products. I should mention the segment accounting here is a little different than you’re probably used to seeing. Jewett-Cameron separates out its corporate function and charges its subsidiaries for corporate services provided. It then shows a profit on the corporate line. As a result, all of the segments here look worse than they tend to when broken out by most public companies – because, most public companies are showing you segment data without charging each segment for corporate functions. The figures shown here probably better represent what each segment would look like if it was broken off from Jewett-Cameron and made a separate business. Really, the only meaningful business for an investor to consider is the “pet, garden, and lawn” business which did about $4 million in EBIT last year against an enterprise value of about $30 million here. So, the entire company is selling for like 7-8x what that one segment did in pre-tax income. Given that over 100% of EBIT comes from that segment and that the market cap and enterprise value here are reasonable versus the peak earnings of that segment alone – I’m really only going to analyze Jewett-Cameron as if it was just the pet, garden, and lawn business.
That business is seasonal. It ties up a meaningful amount of capital for a short period each year. But, the average amount of capital tied up in this segment is low versus the earnings it produces. After-tax returns on capital in the business would be in the 10-40% range for that segment alone. Earnings retained to grow that segment should create value over time. Earnings retained in other segments may not. Analyzing earnings retention is important here, because Jewett-Cameron does not pay a dividend. In fact, it never has paid a dividend. However, if you look at the “retained earnings” line of the balance sheet and compare it to the amount of reported profits in recent years – you’ll see something is off. This company only has like $20 million of retained earnings financing the company. The company doesn’t use debt. It has some excess cash. Really, all cash here is excess as receivables and inventory are very high versus total liabilities and the company has an undrawn credit line. So, this is a self-financed business that is conservatively financed from past earnings. And yet a lot of those cumulative earnings are missing. Where’d they go?
The company bought back stock. Over the last 10 years, Jewett-Cameron bought back about 60% of its shares outstanding. In fact, you can see in the last 3 fiscal years – this company is a very aggressive buyer back of its own stock. In 2 of the past 3 years, the company authorized a buybacks plan for 5% or more of its shares outstanding. That’s not that unusual. Many companies have authorizations like that. But, Jewett-Cameron then went out and used up all of that authorization in like half a year. That’s very rare. On top of that, the company carried out an even bigger buyout of an insider. As a result, this company has reduced shares outstanding at like 7-8% a year even in very recent years. It hasn’t done any buybacks in the last 6 months or so. COVID may have put the strategy on hold. However, there is a clear strategy here. Jewett-Cameron mentions it has not paid dividends and doesn’t plan to. It always includes language that it has “historically” used excess cash to buyback its shares. The company issues very little restricted stock to insiders. It had an option plan (that it made very little use of) and then cancelled it. This company is unusually stingy with its share count.
Why is that? It’s not so clear to me anymore. Jewett-Cameron’s predecessor was founded in the 1950s. But, this current corporation dates back to the 1980s. An investor group took over the company then and one of them (now dead) ran the company for about 35 years. He owned a lot of stock. One member of the investor group is still alive. He collects a large (for his position) salary of about $200,000 to act as the corporate secretary. He also owns 1% of the company. No other executives, directors, etc. own any meaningful stock anymore. About 30% of the company is controlled by two different trusts, foundations, etc. I am assuming this is the result of the death of the former CEO (who was a major shareholder).
The current CEO (who also acts as the CFO) owns less than 1% of the company and is paid more like a professional manager than an owner.
So, what we have here is a potentially interesting business segment inside of a company that seems to be run pretty frugally and has a buyback focused capital allocation strategy. While cheap – the stock price does not look so amazing for stocks of this size, in this industry, etc. to attract quantitative value investors. But, the organization looks very different than what I’m used to seeing among microcaps. This business has been profitable for a very, very long time. And it has used a lot of those profits to buy back stock. This is very rare.
What about the business though?
It’s in flux. So much flux, in fact, that I don’t think I can draw any conclusions from the last couple years of data. And, it’d be really helpful to do that because we are only a few years into a change in management, strategy, etc. But, all of that is likely masked by other factors.
A lot more seems to be changing with this business than I expected. That’s probably because of 3 factors: 1) new CEO after 30+ years of the same CEO, 2) U.S. trade war with China, 3) COVID.
This company makes most of its money on metal products imported from China (almost 100% of supplies are from China) and sold in the U.S. (almost 100% of sales are in the U.S.). The products are not very differentiated except for the technology applied to them (how the gate mechanism works, etc.). A lot of this is importing a commodity and then selling it through. Although the company does some work of its own in its Oregon facilities – the real profits here seem to be coming from products that are contract manufactured in China.
Jewett-Cameron’s Concentration is very high both among the suppliers (manufacturers in China) and the customers (home improvement stores and online shopping sites). One customer accounts for 30% of sales. The top ten account for 75-80%. Supplier concentration is also very, very high.
The fact that Jewett-Cameron’s profitability seems to rest on a single path of importing from China to sell in the U.S. is an issue when we consider the change in tariffs.
Jewett-Cameron is now importing products with a 25% tariff on them. Does that matter? I’m not sure it does. There was some confusion around the tariffs (what would be exempt, when the tariffs would take effect, whether they’d be 10% or 25%, etc.) and this probably changed when customer placed orders. However, I’m not sure a 25% tariff would make much of a competitive difference here. It should be passed along to the consumer without a lot of trouble. I don’t know if demand would be harmed much by the tariff. Other kinds of home related construction costs have risen a lot more than 25%. And, for now, it’s impossible to tell why kind of reluctance you’d normally get to a price increase, because COVID made people stay home which drove up the amount of new dogs and the amount of home improvement work and so on. As a result, I don’t think 2019, 2020, or what we’ve seen of 2021 are really normal years for this company. Anything from the time when the tariff was planned through people staying home due to COVID is potentially misleading.
In fact, the disruption goes beyond that. Jewett-Cameron became concerned about rapidly increasing demand during COVID at the same time they were seeing disruptions to manufacturing and shipping out of China. A lot of this is just-in-time. And, as a result, the company would need to build up unusually high levels of inventory. The balance sheet and cash flow statements reflect this. The company has also warned that while they were able to get a lot of product into the country on normal terms – that’s unlikely to be the case going forward. Orders may be delayed. There may not be sufficient availability of shipping containers and so on. The combination of the tariffs, the boom in spending on pets, and the disruption of Chinese manufacturing and shipping means that I don’t have much faith in any of the figures we have seen recently. I don’t believe demand levels or supply levels are normal right now. Pricing may change a lot. I don’t have any reason to believe the competitive position of the company has changed due to these factors. But, I can’t be sure. And we don’t have any evidence of what the impact of tariffs would be during normal times. The tariffs have only consistently been in place during a time of unusual demand combined with disrupted supply.
Adding to this, the company is spending more on cap-ex and increasing operating expenses. Headcount was increased quite a lot on a percentage basis. They are renovating a building to add a second floor of office space. They are renovating some R&D space as well. It actually sounds like a lot of changes are happening at the same time. This was all planned before COVID. They went through with a lot of it despite COVID.
Is this good or bad?
Without some scuttlebutt, I can’t tell. But, this looks on the surface like a company with a ton of promise for an overhaul. Shifting what the company focuses on selling while investing a lot more in marketing could change the future earnings of this company quite a bit. The core economics have historically been good. And they’ve been disguised by other segments that don’t contribute to profit and do distract management. One segment has already been closed down. In another (the seed business) the company mentions trying to increase cleaning of seeds for local clients as opposed to just wholesale of seeds. I think any profits this segment has earned historically come from cleaning and not from wholesale. And then the company has introduced new products in the pet category. Sometimes, there can be improvements to marketing when a long-time CEO is replaced and more is spent on increasing sales and marketing efforts.
The company competes in categories that are not small. However, it is difficult to assess the competitive position and understand how Jewett-Cameron’s brands compare to those of competitors. You can look at the company’s website and see the “Lucky Dog” brand and all of that. I don’t know how much bargaining power a company like this is ever going to have over home improvement stores and online shopping sites. But, I also don’t know that contract manufacturers in China will ever have much bargaining power with Jewett-Cameron. It’s difficult to estimate gross margins here and what the mar-ups are. We know company-wide gross margins are reported in the 20-30% range (usually about 20%). However, I think that may be misleading and the pet stuff really generates a lot more gross profit than the other businesses. Also, to the extent we’re dealing with a largely seasonal and largely just-in-time business – the fact gross margins are low is really not much of an impediment to earning high returns on invested capital in the pet business. All signs point to a good return on capital in that category.
The company is overlooked. And the long-term history of how well it did as a stock while not growing does suggest that any pivot toward more marketing investment if combined with the same capital allocation could turn this into a good holding for the future.
Nonetheless, I think this is an industry where it is hard for me to understand the differentiation. So, it’d require a lot of scuttlebutt to invest in a stock like this.
It is not an obvious value stock (it’s expensive against things like price-to-book). But, the history of how well this stock performed while shrinking its business in real terms is very unusual and definitely a sign of a stock to study further.