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A Quality Exec Comp Plan Lowers The Risk Of Investing In John B. Sanfilippo & Son

Four new stocks make May’s Exec Comp Aligned with ROIC Model Portfolio, available to members as of May 14, 2021.

Recap From April’s Picks

Our Exec Comp Aligned with ROIC Model Portfolio (-1.1%) outperformed the S&P 500 (-2.5%) from April 15, 2021 through May 12, 2021. The best performing stock in the portfolio was up 12%. Overall, 10 out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P from April 15, 2021 through May 12, 2021.

This Model Portfolio only includes stocks that earn an attractive or very attractive rating[1] and align executive compensation with improving ROIC. I think this combination provides a uniquely well-screened list of long ideas because return on invested capital (ROIC) is the primary driver of shareholder value creation.

New Stock Feature for May: John B. Sanfilippo & Son, Inc.

John B. Sanfilippo & Son, Inc. (JBSS) is the featured stock in May’s Exec Comp Aligned with ROIC Model Portfolio.

We made John B. Sanfilippo & Son a Long Idea in July 2020 as part of our “See Through the Dip” thesis. Since then, the stock is up 5% vs. +30% for the S&P 500. However, we believe the stock still provides attractive risk/reward.

John B. Sanfilippo & Son has grown revenue by 5% compounded annually and net operating profit after tax (NOPAT) by 11% compounded annually over the past ten years, per Figure 1. NOPAT margin increased from 4% in 2010 to 7% over the trailing-twelve-months (TTM).

Figure 1: John B. Sanfilippo & Son’s NOPAT Growth: 2010 – TTM

Performance-Based Pay Properly Incentivizes Executives

John B. Sanfilippo & Son’s executive compensation plan aligns executives’ interests with shareholder’s interests by tying cash incentives to year-over-year improvement in economic profit, which is similar to our calculation of economic earnings.

John B. Sanfilippo & Son’s inclusion of economic profit as an executive compensation metric has helped drive shareholder value creation and economic earnings, per Figure 2. John B. Sanfilippo & Son’s ROIC improved from 10% in 2015 to 18% TTM while its economic earnings grew from $21 million to $50 million over the same time.

Figure 2: John B. Sanfilippo & Son’s Economic Earnings: 2015 – TTM

JBSS Is Undervalued

At its current price of $92/share, JBSS has a price-to-economic book value (PEBV) ratio of 0.5. This ratio means that the market expects John B. Sanfilippo & Son’s NOPAT to permanently decline by 50%. This expectation seems overly pessimistic for a firm that has grown NOPAT by 11% compounded annually over the past decade.

Even if John B. Sanfilippo & Son’s NOPAT margin falls to 4% (10-year average vs. 7% TTM) and the firm grows revenue by just 1% compounded annually over the next 10 years, the stock is worth $115/share today – a 25% upside. See the math behind this reverse DCF scenario. In this scenario, John B. Sanfilippo & Son’s NOPAT falls by 4% compounded annually over the next decade, which is well below its 11% compounded annual NOPAT growth over the prior decade and 9% over the past two decades. Should the firm grow NOPAT more in line with historical growth rates, the stock has even more upside.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology[2] 

Below are specifics on the adjustments we make based on Robo-Analyst findings in John B. Sanfilippo & Son’s 10-K and 10-Qs:

Income Statement: we made $11 million of adjustments, with a net effect of removing $4 million in non-operating expenses (<1% of revenue).You can see all the adjustments made to John B. Sanfilippo & Son’s income statement here.

Balance Sheet: we made $72 million in adjustments to calculate invested capital with a net increase of $40 million. One of the largest adjustments was $14 million (5% of reported net assets) in other comprehensive income. You can see all the adjustments made to John B. Sanfilippo & Son’s balance sheet here.

Valuation: we made $80 million in adjustments with a net effect of decreasing shareholder value by $80 million. There were no adjustments that increased shareholder value. Apart from total debt, the most notable adjustment to shareholder value was $32 million in underfunded pensions. This adjustment represents 3% of John B. Sanfilippo & Son’s market cap. See all adjustments to John B. Sanfilippo & Son’s valuation here.

Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

[1] Get 3rd-party reviews of our research from Harvard Business School, MIT Sloan, The Journal of Financial Economics , and a top 3 accounting firm.

[2] Harvard Business School features my firm’s research automation technology in the case Disrupting Fundamental Analysis with Robo-Analysts.

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