Stock Analysis: Lassonde Inc.

I get to meet with a lot of CPG companies in my day job (I work for a regional grocery chain). Naturally, I take the information they give me and look at it from an investing perspective. Don’t tell the SEC!

Uh, that isn’t insider trading. You moron.

ITALICS MAN IS BACK!

(A short explanation for the 99% of you who won’t get that joke. In my old personal finance blog, Financial Uproar (RIP), I introduced this character who would object to things in the most dickish way possible. I ended up calling him Italics Man. He was probably the best part of that whole blog.)

A conversation with our Lassonde (TSX:LAS.A) sales rep is exactly what inspired my recent research into the company. And then this blog post. It also trades at a 52-week low, which also piques my interest.

Lassonde essentially controls the tetra (shelf stable) juice market in Canada. They’re owners of a number of brands, prominently Oasis, Sun Rype, and Sparkling Ice in my neck of the woods. They also do a bunch of private label in both Canada and the United States. The only real competition is Minute Maid.

On the surface, that looks like a moat. And a pretty solid one at that. But once we dive a little deeper, there are a few problems. Firstly, the tetra juice category isn’t the only place for flavoured sugar water. Consumers have all sorts of alternatives. Secondly, there’s another juice section in the grocery store (chilled juice) that is a growing category and is dominated by Minute Maid — or Simply Juice in Canada — and Tropicana, who are owned by Coke and Pepsi, respectively. Those are two competitors you don’t want to go up against.

In other words, Lassonde owns a category that is slowly shrinking as consumers change from crappier products (juice blends with a lot of sugar added) to superior options like perceived higher quality chilled juices or water.

Thanks to acquisitions, price increases, and a small diversification into other food products (more on that later), Lassonde has been able to eke out small top line gains over the last few years:

You can see a big increase from 2019 to 2020 (three guesses to what caused that), and then the company kept most of those gains last year. Like most other processed food companies Lassonde has passed through price increases for 2022, meaning this year should see the top line creep a little higher again. According to the analyst data collected by Tikr, revenue will come in at close to $2 billion for 2022.

I’ve been following quarterly results for many of the big food giants and most are reporting the same thing. They’ve been successful passing through price increases without taking a big hit to volume. This should bode well for Lassonde.

How Cheap is it?

The interesting part of Lassonde is definitely its valuation. The stock seems to hit a new low every day and is now trading at a dirt cheap P/E multiple.

The company earned $11.18 per share last year, results that were impacted negatively by issues from the U.S. side of the business and unfavourable currency moves. The stock currently trades hands at $137. This gives us a trailing P/E ratio of just a hair over 12x.

Free cash flow (or at least my quick and dirty definition of it) is even stronger. Lassonde has made a number of acquisitions over the years, leaving it considerable intangible assets on its balance sheet. As they write these intangible values off this creates a situation where free cash flow is stronger than earnings.

My admittedly basic formula is to simply take earnings and add depreciation and amortization expenses back into them to get free cash flow. I would then deduct any capex expenses, but Lassonde doesn’t have major capex these days. So we’ll conveniently ignore that.

Earnings were $77.5 million. Add $24 million in these expenses and we get a hair over $100 million in “owner’s earnings” (as Buffett calls them) or “half assed free cash flow” (as an investor 1000x better than Buffett calls them). Convert that back to a per share basis and we get a number north of $14.50 per share.

Analysts are also relatively bullish for 2022. They collectively predict the company will do almost $2 billion this year in revenue and earn a smidge over $12 per share. That gives us a forward P/E ratio of just over 11x.

Finally, Lassonde is slowly diversifying away from juice. It has a subsidiary that produces apple cider and certain types of wines. It also has investments in the pasta sauce business. At this point these are tiny investments that only generate a small portion of the total company’s revenues, but they’re likely setting things up for a much larger deal down the road.

Why I’m not buying

Lassonde is a tricky one. It clearly has a moat, even if that moat is in a struggling category. It has been able to slowly increase its bottom line over the years despite the somewhat shaky position.

It also has numerous expansion avenues, including acquiring more U.S.-based juice manufacturers or further using its current infrastructure to diversify into other similar food businesses.

The company follows a pretty predictable pattern. It takes on debt to do an acquisition. It then cuts some costs and uses the cash flow to decrease the debt. A year or two later it does another deal. The model has worked in the past and it should work going forward as well.

The low valuation is attractive, of course. So is knowing that the company doesn’t always trade at such a low P/E multiple. A year ago, shares were close to $200 each. In 2018 the stock peaked at nearly $300 per share. The market has shown it can get excited about the company, although I’m the first to admit the trend has not been your friend with this one over most of the last five years. It has steadily declined.

There’s also a half decent dividend here. The current yield just passed 2.5% and there’s plenty of potential for the payout to climb higher over time. After all, the payout ratio is approximately 25% of next year’s earnings.

But ultimately, I just don’t think this is a great business. Operating margins are consistently in the 6-8% range, which is low both on a relative basis but also low compared to many other CPG companies. Juice is something of a commodity product that people buy when it’s on sale at the grocery store. It’s far less attractive than Doritos.

(Aside: I’m a long-term Pepsi shareholder who would buy the crap out of a Frito-Lay spin off. I own the stock despite the soda exposure. This is one of my biggest pet peeves in the market today, and I’ve written about it before. Absolutely no reason to keep the soda and chip divisions inside the same company.)

The company also doesn’t really care about its shareholders, either. It has a dual class structure. As far as I can tell it has never made a real effort to buy back shares, although it has bought back a few in its most recent quarter. It has an affordable dividend, but no effort has been made to increase the payout on an annual basis. Dividend growth should come over time, but it’ll be lumpy.

In conclusion, this is a meh company that happens to be trading at a low valuation. It doesn’t make sense to buy it when there are so many other cheap stocks out there.