In yesterday’s post, I discussed my investment in JCTCF and how I was having trouble buying more because of the price run up despite a similar rise in intrinsic value. Today, I wanted to review results and discuss why I thought it was still so cheap.
I think there are three ways to determine just how cheap JCTCF is.
The first and most simple is a simple EV / EBIT analysis. Over the past twelve months, JCTCF has earned just short of $4.2m in operating income. With 1.57m shares outstanding and a share price of $15.25, JCTCF has a market cap of just under $24m. They have over $7.2m in cash, which gives them an EV of ~$17m andan EV / EBIT of 4x. For a company that just posted almost 30% quarter over quarter revenue growth, that’s pretty dang cheap!
The second comes from Charlie Munger’s “share cannibal” thesis (see this interview). Munger says there are three great places to look for investments. One of them is companies that are buying back massive amounts of shares. And JCTCF ranks very, very highly on that count. From fiscal 2010 to fiscal 2012, they retired 32% of shares outstanding, and they have authorization to repurchase 25% more of their shares.
One negative is the company did not repurchase their shares in the first quarter. I don’t think this is the end of the world by any means. I think the company didn’t repurchase shares for a few reasons.
- Traditionally, the company has repurchased from their ESOP. They’ve fully exhausted the ESOP, so they now need to repurchase from the open market. Given the low volumes of the stock, it’s probably tough to repurchase in size and they’re probably looking for big blocks to repurchase.
- Management has historically been very disciplined with share repurchase prices. Like me, they’re probably adjusting to the higher intrinsic value of the company now.
So what do I think a fair price is. Honestly, I would think a company this strong would deserve at least a 10x EV / EBIT multiple. Even without adjusting for upside from the industrial wood segment, that would imply an EV of $42m. Add in their cash and you’re looking at a market cap just under $50m, or a share price around $32. While I normally don’t like to use P/E multiples, that would equate to a trailing P/E under 15x (if you take their trailing net income and adjust for their current shares outstanding, EPS comes in over $2.15 per share), which considering their significant excess cash balance would still feel a bit cheap to me.
And if management can continue to grow or repurchase shares at these prices, that target should prove too conservative.
Disclosure- Long JCTCF
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