The three major stock market indexes plunged on Tuesday, and many blame weaker-than-expected U.S. economic data and the strong dollar.
Well, the strong dollar had nothing to do with J&J Snack Foods’ (JJSF) 14% decline the same day. Shares dropped $16.09 to close at $98.53.
Instead, the dip can be blamed on 1) mixed first-quarter earnings results and 2) a downgrade by KeyBanc from “Buy” to “Hold.”
But was the downgrade justified?
Let’s Review the Numbers
The following chart shows how shares of the New Jersey-based maker of snack foods and beverages has given up a large portion of its 2014 gains on the news…
So just how bad were the Q1 numbers for the company best known for the SuperPretzel and Minute Maid frozen juice bars?
The company reported earnings of $0.60 per diluted share, which represents a 9.1% decrease over Q1 2014 results. This missed analyst earnings expectations by $0.10.
But despite the earnings miss, the company’s total revenue number beat expectations of $212.6 million. Sales increased by more than 4.5% over the Q1 revenue total.
Furthermore, the company posted increases in each of its three business segments: food service (+3.4%), retail supermarket (+11%), and frozen beverages (+5%).
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J&J’s gross profit increased by 2%, rising from $59.9 million in Q1 2014 to $61.1 million in the company’s latest quarter.
However, J&J saw its operating income fall by 7.6% to $16.6 million in the first quarter, while its net income decreased 9.4% to $11.3 million.
J&J also experienced some weakness in its gross margin, which contracted 70 basis points to 28.7%. Additionally, the company’s operating margin contracted 100 basis points to 7.8%.
Now, you might think the mixed results justify the KeyBanc downgrade and a bearish outlook for the snack food maker…
But KeyBanc’s downgrade is premature.
You see, the weak quarterly results can be attributed to the unexpectedly high costs surrounding the acquisition of Philly Swirl, which J&J Snack Foods purchased in May 2014.
According to the company’s conference call, more than 40% of the company’s increased expenses are directly attributed to the Philly Swirl acquisition.
Now that the acquisition is complete, revenue from Philly Swirl should be accretive to the company’s bottom line in 2015 and beyond.
Bottom line: The stock downgrade by KeyBanc, coinciding with the market selloff, has provided investors an opportunity to pick up shares of the snack food company at a significant discount to its future value.
While the stock may trade a few points lower from here, over the longer term, the stock will rebound and go higher.
That makes it a perfect time to dollar cost average into the stock, while using the $1.44 annual dividend (1.3% yield) to enjoy a nice hot pretzel.