Jewett-Cameron is still cheap

by It will fluctuate

More good news from Jewett-Cameron (JCTCF): It announced yesterday a new repurchase program for up to 13% of the company. In the recent past, they company has been a greedy repurchaser – since 2009 they’ve bought back 1/3 of the shares outstanding at an average price of $4.3 per new share (I say “new” because the share split 2-for-1 recently), well below the current price of $10, and well below intrinsic value.

I bought the stock a couple of years ago, when it was cheap on an earnings basis, and also traded at close to NCAV. Since then, the price has gone up quite a bit, but so have the earnings.

In the Feb 2013 10-Q it had tangible book value of over $18m (4.3m cash + 14.7m of other current assets + 2m of PPE – 2m of current liabilities). I suppose that in a liquidation the shareholders could get the NCAV of about $16.5m. But the company is very far from a liquidation.

Is it still cheap? Will buybacks at this price make the remaining shareholders richer?

Let’s see. The company is made up of:

  • A wholesaler of wood fences and metal dog kennels, gates, greenhouses, etc, that is growing and on average has made a yearly operating income of $3.5m for the past four fiscal years (which end in August). The op. income of the fist two quarters of the current fiscal year looks much better than that of the same period of last year.
  • A distributor of wood products, a seed seller and processor, and an importer and distributor of industrial tools. Together these three businesses have lost money in the last four fiscal years ($787k of op. income in total for the four years). But, (1) in the last fiscal year they made money ($188k op. income), (2) they did better still in the first two quarters of the current year and (3) the wood distributor used to make quite a bit before the recession, when boat manufacturers were buying their wood (op. income was about $1.7m per year from 2004 to 2006, and a little over $1m in each of 2006 and 2007).

So, today the whole company sells for $26m ($30m mkt cap + $0 debt – $4m cash), or about 6x the $4.5m TTM pre-tax earnings, which have been growing, and might possibly grow a lot more if their wood distribution business eventually improves. This is in a company managed by a CEO (Donald Boone) who owns over 30% of the shares but pays himself only $40k, who has done a great job of containing the costs of the business that is suffering while growing the business that is thriving, and who repurchases shares like a madman when they’re cheap. Can you ask for better management?

Jewett’s reported income is very similar to owner earnings: Its book value today is the same as that of August 2009, and the other line items of both balance sheets also look similar, but in the meantime the company has used $7.1m to repurchase it’s own stock. Meanwhile, during that period net income has added to almost the exact same amount. It’s hard to argue that net income is not real when it’s been taken out of the business and yet the remaining assets continue to produce ever greater earnings.

At this price, I’d say the company is not crazy cheap, but not a bad investment at all.

I, and people whose accounts I manage, own shares of JCTCF.

P.S. Thanks to Whooper Investments, who by the way has also written about Jewett, for the post that made me decide to start a blog. We’ll see how this goes.

Disclaimer: This post, and everything else on this website, is only my opinion, and should not be seen as investment advice.

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