Johnson Outside Inventory: Ache Persists, However So Does Potential (NASDAQ:JOUT)


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Buying stock in a company that’s struggling a bit can be a profitable proposition. This is especially true when you can buy stocks cheaply with the notion that market conditions will eventually change to enhance. At the same time, this strategy can also lead to unfavorable results in the short term. For example, if the said company’s financial performance continues to deteriorate, additional pain could arise in the near term regardless of the long-term outlook. A great example of this I think can be seen upon viewing Johnson outdoors (NASDAQ:JOUT), a company focused on the manufacture and sale of outdoor leisure products. Stocks have fallen recently, largely due to a weakening of the company’s profitability. This trend could well continue for the foreseeable future. But even if it does, it’s hard to imagine the company looking overvalued. And once business returns to more normal levels, the shares could see some nice upside potential.

more pain

The last time I wrote an article about Johnson Outdoors was in June of this year. In this article, I spoke about the solid operational history that the company has demonstrated over the years. At the same time, I also admitted that it has hurt a bit so far this year. I was disappointed with that but still believed the company deserved some attention at that moment. That was because the shares were trading cheap, and even if the painful trend continues, the worst-case scenario, in my view, was that the shares should be fairly valued. Ultimately, these conclusions led me to give the company a Buy rating, reflecting my belief that returns for the company should ultimately be higher than what the market should see for the foreseeable future. Things haven’t quite gone according to plan since then. While the S&P 500 was up 4.9%, shares in Johnson Outdoors were down 11.1%.

Author – SEC EDGAR data

Given this significant difference in returns, you might think there’s an underlying cause that was the driver. In this case you are absolutely right. When I last wrote about the company, we only had data for the second quarter of fiscal 2022. Today, that data now extends by another quarter to Q3. The company’s revenue for the quarter was $203.8 million. That’s a slight decrease from the $213.6 million generated a year earlier. Interestingly, the company actually saw strength in most product categories. For example, watercraft sales for the company grew 10.1% year over year, while scuba-related sales increased 7.4%. The real winner, however, was the Camping category. Revenue there rose 32.2% year over year. Instead, the pain had to do with the company’s biggest category: fishing. Revenue there fell 12.1% year over year, falling to $136.6 million from $155.3 million. Management claimed that this decline came despite solid consumer and customer demand. Instead, the pain was due to supply chain disruptions and the resulting unavailability of certain necessary components, ultimately resulting in lost sales. In particular, the company has been hampered by the technical and electronic nature of certain products in this category and the supply chain issues associated with these types of products.

Historical finances

Author – SEC EDGAR data

With falling revenue, profitability followed. The company’s net income fell from $28.8 million in the third quarter of 2021 to $14.1 million at the same time this year. This was almost entirely due to fishing category operating profits, which fell 58% from $39.4 million to $16.6 million. Higher raw material costs hit the company across the board. However, these cost items were particularly bad for the fisheries category due to supply chain issues. This decline in net income also led to weaker earnings in other ways. Operating cash flow, for example, fell from $69.6 million in the third quarter of 2021 to $18.2 million at the same time this year. Even adjusting for working capital changes, it would have fallen from $32.8 million to $18.7 million. Meanwhile, the company’s EBITDA also suffered, falling to $27.3 million from $41.2 million. And as seen in one of the charts in this article, weakness in both revenue and earnings accounts for visitors also resulted in weaker overall performance for the first three quarters of fiscal 2022 as a whole.

Unfortunately, we don’t really know what to expect for the full fiscal year 2022. What is clear, however, is that 2022 will not be nearly as positive as 2021. If we were to extrapolate using the results for the first three quarters of the year, we could expect net income of $37.9 million, operating cash flow of around $54 $.7 million and approximately $71.4 million in EBITDA. These estimates are slightly higher than the previous estimates I calculated in my last article of $36.4 million, $53.5 million, and $65.9 million, respectively. Given these numbers, shares of Johnson Outdoors should trade at a forward price to earnings multiple of 15.7, a forward price to operating cash flow multiple of 10.7 and an EV to EBITDA multiple of 6.7, respectively .

Trade multipliers

Author – SEC EDGAR data

To put this in context, using 2021 data, these multiples were 7.1, 6, and 3.9, respectively. And if the company returned to the level of profitability it achieved in fiscal 2020, those numbers should be 10.8, 7.8, and 5.8, respectively. As part of my analysis, I also compare the company to five similar companies. On a P/E basis, these companies have ranged from 3.9 to 25.5 using forward estimates. Our prospect was cheaper than all but one of the companies and tied to each other. Using the price-to-operations cash flow approach, only four companies achieved positive results, ranging from 4 to 14.8. Two of the four were cheaper than Johnson Outdoors in this case. And when it comes to the EV to EBITDA approach, the range was between 3.3 and 9.8, with two of the companies being cheaper and another being related.

company price/profit Price/Operating Cash Flow EV/EBITDA
Johnson outdoors 15.7 7.1 10.8
Smith & Wesson brands (SWBI) 7.1 14.8 3.3
Famous Corp. (CLEAR) 25.5 13.6 9.8
AMMO (POWW) 14.7 N / A 4.9
Latham Group (SWIM) 36.1 5.7 5.8
Exterior view (VSTO) 3.9 4.0 3.3

click to enlarge

Bring away

Based on all the data provided, it is clear that Johnson Outdoors continues to have some issues. Depending on the market situation, this picture could remain the same for a while or even deteriorate further. Eventually the situation will improve, but it will take patience and time to get there. Even if future financial performance were in line with projections for 2022, I can’t imagine stocks being worse off than fairly valued. In particular, the company benefits from the fact that it has no debt and has cash and cash equivalents of USD 117.6 million. Compared to similar companies, the company could easily be on the lower end of the scale, which most likely indicates some upside potential as well. All in all, I still believe the company offers a cheap risk-reward interview, which makes me maintain my Buy rating for now.