A Quality Executive Compensation Plan Lowers The Risk Of Investing In John B. Sanfilippo & Son,

Recap from August Picks

The Exec Comp Aligned with ROIC Model Portfolio (-0.8%) underperformed the S&P 500 (+1.4%) from August 16, 2023 through September 12, 2023. The best performing stock in the portfolio was up 8%. Overall, 5 out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P from August 16, 2023 through September 12, 2023.

This Model Portfolio only includes stocks that earn an attractive or very attractive rating 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 September: John B. Sanfilippo & Son, Inc.

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

John B. Sanfilippo & Son has grown revenue and net operating profit after tax (NOPAT) by 3% and 10% compounded annually, respectively, since fiscal 2013. The company’s NOPAT margin improved from 4% in fiscal 2013 to 7% in fiscal 2023 (year-ended June 29, 2023), while invested capital turns rose from 2.3 to 2.7 over the same time. Rising NOPAT margins and invested capital turns drive the company’s return on invested capital (ROIC) from 8% in fiscal 2013 to 18% in fiscal 2023.

Figure 1: John B. Sanfilippo & Son’s Revenue & NOPAT: Fiscal 2013 – Fiscal 2023

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 my calculation of economic earnings.

The company’s inclusion of economic profit as a performance goal has helped create shareholder value by driving higher ROIC and economic earnings. When I calculate ROIC using superior fundamental data, I find that John B. Sanfilippo and Son’s ROIC has increased from 8% in fiscal 2013 to 18% in fiscal 2023. Economic earnings rose from $18 million to $44 million over the same time.

Figure 2: John B. Sanfilippo & Son’s ROIC: Fiscal 2013 – Fiscal 2023

JBSS Has Further Upside

At the current price of $102/share, JBSS has a price-to-economic book value (PEBV) ratio of 1.2. Though the company’s PEBV ratio is higher than other featured stocks, the stock still holds upside.

If I assume John B. Sanfilippo & Son’s NOPAT margin remains at 7% and the company grows revenue by 4% compounded annually (vs. 11% in fiscal 2022 and 5% in fiscal 2023) over the next decade, the stock would be worth $122/share today – a 20% upside. See the math behind this reverse DCF scenario. In this scenario, John B. Sanfilippo & Son’s NOPAT grows 4% compounded annually through 2033.

For reference, John B, Sanfilippo & Son has grown NOPAT by 10% compounded annually since 2013. 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 My Firm’s Robo-Analyst Technology

Below are specifics on the adjustments I made based on Robo-Analyst findings in John B. Sanfilippo & Son’s 10-K:

Income Statement: I made $7 million in adjustments with a net effect of removing $3 million in non-operating expenses (<1% of revenue).

Balance Sheet: I made $32 million in adjustments to calculate invested capital with a net increase of $24 million. One of the largest adjustments was $9 million (3% of reported net assets) in asset write-downs.

Valuation: I made $43 million in adjustments, all of which decreased shareholder value. The largest adjustment to shareholder value was $28 million in underfunded pensions. This adjustment represents 2% of John B. Sanfilippo & Son’s market value.

Disclosure: Kyle Guske II owns JBSS. David Trainer, Kyle Guske II, Italo Mendonca, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.

Read the full article here