This week J&J Snack Foods (NASDAQ:JJSF) reported first quarter earnings that the market found to be somewhat appetizing. The stock rose above the $160 mark for the first time since November only to reverse course in the highest daily trading volume the stock has ever seen.
With so much investor interest in J&J Snack Foods, the maker of the SuperPretzel and other popular snacks and beverages seems to be at a crossroads. Will the bulls or bears win this tug of war? Let's take a step back and see what the fuss is all about.
What Did J&J Snack Foods Report in Q1?
J&J Snack Foods announced a 15% drop in revenue to $241 million for its fiscal first quarter than ended the day after Christmas. Profits were sharply lower compared to the same period a year ago ($1.8 million versus $17.1 million) largely due to the impacts of the pandemic. A sharp decline in operating income was partly the result of $730 thousand of COVID-19 related expenses to keep its workforce and customers safe.
But more importantly, the weak sales figure was caused by ongoing effects of the pandemic. Roughly two-thirds of J&J's revenues are derived from food service venues that are still far from operating at their pre-COVID levels. The impact of these revenue sources was even more pronounced during the holiday quarter when most of its customers typically see higher sales volumes.
The quarter was a tale of two customer segments for J&J. The retail channel continued to experience strong growth as stockpiling consumers snatched up their favorite snack items from grocery and convenience stores.
The thorn in the company's side, however, remains the food service segment which has had little need to order J&J's products because they are operating well below capacity or are closed. This includes placed like movie theaters and sporting venues where people usually don't think twice about paying a premium to indulge things like in overpriced Sour Patch Kids and Slush Puppies.
What was the Market's Reaction to J&J Snack Foods Earnings?
With the company falling short of both the Street's top and bottom-line estimates, the stock was taken for a wild ride on Tuesday as the share price fell as low as $148.78 and climbed as high as $165.70. It ultimately closed near the day's high at $164.91.
The stock has since trended lower dipping as low as around $155 in Thursday morning trading. Traders appear to be odds about whether the recent quarter marked a turnaround or was a signal of more stale earnings ahead.
Glass half full investors liked the fact that the 15% revenue drop marked an improvement over the previous quarter's 19% decline and see better times ahead. The glass half empty investors, on the other hand, scorned the earnings shortfall and persistent challenges of the key food service business.
There are merits to both viewpoints, but management's cautious outlook is important to note here. J&J Snack Foods said that it expects that the coronavirus will continue to have a negative impact on the food service industry and company performance in the near term.
Unfortunately, the sell-side offers little help on J&J Snack Foods. Surprisingly given the strong 35-year track record of returns, only a pair of analysts cover the stock. Following the latest report, Jeffries gave the stock a 'hold' rating and $150 target which suggests further downside from here.
Is it a Good Time to Buy J&J Snack Foods Stock?
It's difficult to judge J&J Snack Foods based on its recent performance as these are certainly not normal economic times. From an investment evaluation standpoint, we should look back to how the company was performing prior to the spring of 2020—and where it can go as food service venues reopen.
Prior to last year J&J had a solid history of delivering sales growth both organically and through acquisitions. Annual sales crossed the $1 billion mark in 2017 and climbed to $1.14 billion and $1.19 billion in 2018 and 2019, respectively. The company has also raised its dividend in each of the last 10 years including 2020.
J&J's credibility from a historical perspective should be a plus for patient long-term investors who may be content collecting the 1.5% dividend yield and waiting for economic conditions to normalize. But short-term traders looking for a quick turnaround story would be better off elsewhere.
So, for now, the bears may have the upper hand. But if the stock starts to slip below $150, J&J Snack Foods would be a good stock for investors to nibble on.
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