Bite Into J&J Snack Foods

By Will Ashworth | April 28, 2011 AAA

Little known J&J Snack Foods (NASDAQ:JJSF) made a tuck-in acquisition in April, purchasing ConAgra's (NYSE:CAG) frozen handheld business, which includes the Patio brand of frozen burritos. Although the terms of the deal weren't released, annual revenues are around $50 million. J&J has a history of paying very little for abandoned brands and then rebuilding them in both the retail supermarket and food service industries. Although its stock is currently trading less than 5% from an all-time high in April 2011, I believe this steady small cap is still an attractive buy. Here's why. (To read more about small caps, check out Small Caps Boast Big Advantages.)
TUTORIAL: Mergers and Acquisitions

Second Quarter Earnings
An analyst recently suggested that the snack food maker's accounts receivables have been rising faster than its revenues since about the third quarter of last year, indicating its Q2 2011 earnings might not be that hot. They weren't. Revenues did grow by 3% to $162.7 million. Unfortunately, higher input costs and operating expenses led to a 6% decrease in operating income. Despite the temporary setback in earnings, this is typical for the company. I owned its stock for a number of years and it is notorious for delivering a couple of stinker quarters and then hitting it out of the park. It takes patience to own this stock but long-term you'll be rewarded. (For more on earnings, see How To Decode A Company's Earnings Reports.)

Possible Takeover
Flowers Foods (NYSE:FLO) recently offered to buy the Tasty Baking Company (NASDAQ:TSTY) for $4 a share, a 148% premium to where it was trading prior to the offer in April 2011. California's Diamond Foods (NASDAQ:DMND), one of my favorite companies anywhere, acquired Pringles for $2.3 billion from Procter & Gamble (NYSE:PG), making it the second largest snack food company in America behind only Frito Lay. Consolidation in the snack food market will continue as companies look for increased market share and economies of scale. J&J Snack Foods founder Gerald Shreiber owns 22% of the company. It is his call whether the company is for sale. I have no idea if he has any interest in turning the page on a successful career but given it has almost no debt and is conservatively run; private equity firms will most certainly have an interest. (To learn about takeovers, read Trademarks Of A Takeover Target.)

Stock Performance
In the past decade, its stock has had only one year with a negative total return and that was in 2007. Otherwise, it's been a blemish-free scorecard, up 18.7% annually over that time, 16.1% better than the S&P 500 in. This doesn't mean there hasn't been any volatility. In the past two years, its stock has dipped below $40 on three separate occasions. My best guess is that this will happen at least once in the next 24 months. While the long-term trend is definitely positive, there will be the occasional setback. Investors should be ready to pounce on its shares. (To help with your own performance, check out Measure Your Portfolio's Performance.)

Bottom Line
J&J Snack Foods is an excellent company. Its gross margins are very consistent and its operating margins have never been better. If you're investing for the long-term (3 to 5 years out), you can feel safe buying at these inflated prices but you might want to keep a little cash on the sideline to buy more when it dips below $40. (To read more on small cap performance, see Small Cap Research Can Have Big Impact.)

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