Markets do not like the Fed’s outlook for 2025. The Dow fell for the 10th straight day, which is its longest losing streak since 1974. As we watch Thursday’s dead-cat bounce peter out, one thing is for sure – markets are teetering. Insider selling is at all-time highs. Wall Street insiders know what’s going on…
This is not the time to follow Roaring Kitty.
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As David Trainer, our CEO, said many times in this special training, the Exec Comp Aligned with ROIC Model Portfolio is his favorite. 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).
We truly believe that incentivizing executives to increase ROIC or economic earnings is the BEST form of corporate governance. Honestly, if you asked David, he would tell you it’s a crime that all executives are not held to that standard. It’s a mystery to us why more companies do not tie compensation to metrics that measure shareholder value creation.
Well, the good news, is that we do the hard work to find those companies. This portfolio provides stocks that not only get our Attractive or Very Attractive Rating, but they are also relative safe havens for investors. They have upside potential and downside protection. What’s better than that?
Today, we’re giving you a free stock pick. We are sharing this month’s featured stock for the Model Portfolio.
The idea behind featuring stocks and sharing these features with you is to give you insights into the uniquely high value-add of our research. We want you to know how we do research, so you know more about how reliable research looks and how real Ai and machine learning work.
We update this Model Portfolio monthly, and December’s Exec Comp Aligned with ROIC Model Portfolio was updated and published for clients on December 13, 2024.
Stock Feature for December: John B. Sanfilippo & Son, Inc. (JBSS: $89/share)
John B. Sanfilippo (JBSS) is the featured stock in December’s Exec Comp Aligned with ROIC Model Portfolio.
John B. Sanfilippo has grown revenue and net operating profit after tax (NOPAT) by 4% and 8% compounded annually, respectively, since fiscal 2014. The company’s NOPAT margin improved from 3.5% in fiscal 2014 to 5.4% over the trailing-twelve-months (TTM). Invested capital turns increased from 2.4 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 2014 to 15% in the TTM.
Figure 1: John B. Sanfilippo’s Revenue & NOPAT: Fiscal 2014 – TTM
Sources: New Constructs, LLC and company filings
Executive Compensation Properly Aligns Incentives
John B. Sanfilippo’s executive compensation plan aligns the interests of executives and shareholders by tying its annual bonus awards to a “Return on Capital/economic value added” model which, according to the company’s proxy statement, the company calls the Sanfilippo-Value Added plan. Under the plan, executives are rewarded for year-over-year improvement in economic profit.
The company’s inclusion of economic profit targets, which are similar to our economic earnings, has helped create shareholder value by driving higher ROIC and economic earnings. When we calculate ROIC using our superior fundamental data, we find that John B. Sanfilippo’s ROIC has increased from 8% in fiscal 2014 to 15% in the TTM. Economic earnings rose from $15 million to $34 million over the same time.
Figure 2: John B. Sanfilippo’s ROIC & Economic Earnings: Fiscal 2014 – TTM
Sources: New Constructs, LLC and company filings
JBSS Has Further Upside
At its current price of $89/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 potential.
Even if John B. Sanfilippo’s
- NOPAT margin remains at 5.4% and
- revenue grows 5% (equal to the past five-year compound revenue growth) compounded annually through fiscal 2034 then,
the stock would be worth $105/share today – an 18% upside. See the math behind this reverse DCF scenario. In this scenario, John B. Sanfilippo’s NOPAT would grow just 4% compounded annually from fiscal 2025 through fiscal 2034.
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’s 10-Ks and 10-Qs:
Income Statement: we made over $10 million in adjustments with a net effect of removing just under $5 million in non-operating expenses. Professional members can see all adjustments made to John B. Sanfilippo’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: we made over $75 million in adjustments to calculate invested capital with a net decrease of over $5 million. One of the most notable adjustments was several millions in asset write downs. Professional members can see all adjustments made to John B. Sanfilippo’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: we made over $115 million in adjustments, all of which decreased shareholder value. The most notable adjustment to shareholder value was total debt. Professional members can see all adjustments to John B. Sanfilippo’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.
This article was originally published on December 20, 2024.
Disclosure: Kyle Guske II owns JBSS. David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
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