No new stocks made January’s Exec Comp Aligned with ROIC Model Portfolio, available to members as of January 13, 2023.
Recap From December’s Picks
Our Exec Comp Aligned with ROIC Model Portfolio (+7.1%) outperformed the S&P 500 (+1.5%) from December 15, 2022 through January 11, 2023. The best-performing stock in the portfolio was up 20%. Overall, 12 out 15 Exec Comp Aligned with ROIC stocks outperformed the S&P 500 from December 15, 2022 through January 11, 2023.
This Model Portfolio includes stocks that earn an Attractive or Very Attractive rating and align executive compensation with improving ROIC. This combination provides a unique list of long ideas as the primary driver of shareholder value creation is return on invested capital (ROIC).
New Feature Stock for January: John B. Sanfilippo & Son, Inc. (JBSS: $79/share)
John B. Sanfilippo & Son, Inc. (JBSS) is the featured stock in January’s Exec Comp Aligned with ROIC Model Portfolio. We made JBSS a Long Idea in July 2020 as one of our ”See Through the Dip” stocks. Since then, the stock is down 12% compared to a 22% gain for the S&P 500. The stock remains undervalued. Get all of our reports on John B. Sanfilippo & Son here.
John B. Sanfilippo & Son has grown revenue and NOPAT by 3% and 10% compounded annually, respectively, since fiscal 2012 (FYE 6/28). The company’s NOPAT margin rose from 3% in fiscal 2012 to 6% over the trailing-twelve-months (TTM), while invested capital turns rose from 2.2 to 2.6 over the same time. Rising NOPAT margins and invested capital turns drove the company’s return on invested capital (ROIC) from 7% in fiscal 2012 to 16% TTM.
Figure 1: John B. Sanfilippo & Son’s Revenue & NOPAT: Fiscal 2012 – TTM
Sources: New Constructs, LLC and company filings
Executive Compensation Properly Aligns Incentives
John B. Sanfilippo & Son’s executive compensation plan aligns the interests of executives and shareholders by tying the payout of cash awards to a targeted improvement in economic profit, which is similar to our calculation of economic earnings.
The company’s inclusion of economic profit as a performance goal has helped create shareholder value through rising ROIC and economic earnings. John B. Sanfilippo & Son’s ROIC improved from 12% in fiscal 2017 to 16% over the TTM. The company’s economic earnings rose from $27 million to $44 million over the same period.
Figure 2: John B. Sanfilippo & Son’s ROIC: Fiscal 2017 – TTM
Sources: New Constructs, LLC and company filings
JBSS Is Undervalued
At the current price of $79/share, JBSS has a price-to-economic book value (PEBV) ratio of 0.8. This ratio implies the market expects John B. Sanfilippo & Son’s NOPAT to permanently fall by 20%. This expectation seems overly pessimistic for a company that has grown NOPAT by 10% compounded annually since fiscal 2012.
If John B. Sanfilippo & Son maintains its TTM NOPAT margin of 6% (compared to three-year average margin of 7%), and the company grows revenue by just 2% compounded annually (vs. 3% CAGR since fiscal 2012) over the next 10 years, the stock would be worth $105/share today – a 33% upside. In this scenario, John B. Sanfilippo & Son’s NOPAT would grow just 2% compounded annually over the next decade. See the math behind this reverse DCF scenario. Should the company grow NOPAT more in line with historical growth rates, the stock has even more upside.
Critical Details Found in Financial Filings by Our Robo-Analyst Technology
Below are specifics on the adjustments we made based on Robo-Analyst findings in John B. Sanfilippo & Son’s 10-Qs and 10-Ks:
Income Statement: we made $10 million in adjustments with a net effect of removing $1 million in non-operating expenses (<1% of revenue). Clients can see all adjustments made to John B. Sanfilippo & Son’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: we made $89 million in adjustments to calculate invested capital with a net increase of $26 million. One of the largest adjustments was $9 million (3% of reported net assets) in asset write-downs. Clients can see all adjustments made to John B. Sanfilippo & Son’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: we made $85 million in adjustments, all of which decrease shareholder value. Apart from total debt, the most notable adjustment to shareholder value was $30 million in underfunded pensions. This adjustment represents 3% of John B. Sanfilippo & Son’s market cap. Clients can see all adjustments to John B. Sanfilippo & Son’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.
This article was originally published on January 20, 2023.
Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Italo Mendonça receive no compensation to write about any specific stock, style, or theme.
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 Our research utilizes our Core Earnings, a more reliable measure of profits, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.