Enter the world of Jewett-Cameron Trading Limited (JCTCF), an Oregon-based manufacturer and distributor, standing tall with a market cap of $14 million and net debt of $7 million. Established in 1953 as a lumber producer, Jewett-Cameron has taken a unique path over the years, engaging in various and diverse business pursuits. Despite its unconventional combination of business lines, the company has remained consistently profitable. What sets this small-sized company apart is its commitment to returning capital to shareholders through buybacks, leading to an astounding 71% reduction in its share count over time.
As an investor, it’s hard to overlook Jewett-Cameron’s exceptional performance in reducing its share count. In 1997, the company had approximately 12 million shares outstanding (split-adjusted). Fast forward to today, and that number has drastically decreased to 3.5 million shares. Few companies of this size have achieved such significant success in reducing their share count. Often, a company worth just $14 million after decades of public ownership indicates something may have gone awry. However, Jewett-Cameron’s small size is simply a result of its strategic decision to return nearly all profits to shareholders. And indeed, shareholders have much to show for it, enjoying an impressive compound annual return of around 13.5% over the last 24 years.
Imagine a shareholder who invested $25,000 in Jewett-Cameron back in July 1997. Today, that initial investment would have grown to nearly $520,000. Moreover, the shareholder’s ownership in the company would have increased from a mere 0.43% to an impressive 1.50%.
But what lies ahead for Jewett-Cameron? Can it continue delivering equally attractive returns? That remains for investors to discern. The company, however, does appear reasonably valued based on its trailing results and benefits from certain economic tailwinds.
It’s crucial to note that Jewett-Cameron Trading comprises three distinct lines of business. However, only one is relevant to the investment case, which is the Jewett Cameron Company (JCC). Operating in the home products segment, JCC offers a wide range of products, including fencing, pet gates, enclosures, umbrellas, patio furniture covers, and more. Despite its odd combination of products, JCC thrives in this market, tapping into Americans’ increasing spending on pets and outdoor living spaces. The company maintains an attractive website showcasing its brands and even has a pet-focused Instagram account. Many of its products designed for dog owners boast endorsements from the prestigious American Kennel Club.
Pre-tax margins for the home products segment hover around 10%, translating to 30 cents in pre-tax earnings for every dollar of gross invested assets. In the trailing twelve months that ended on February 28, the segment reported $4.7 million in pre-tax income.
On the flip side, Jewett-Cameron’s treated wood and seeds businesses exhibit marginal performance. During good years, these segments collectively earn about $100,000 in pre-tax income, but they more often face losses ranging from $100,000 to $200,000. Despite these loss-making operations, it is intriguing to observe Jewett-Cameron’s unwavering commitment to these segments. Perhaps the company genuinely believes that the fortunes of each segment will improve, or it might be seeking to preserve local jobs. Regardless, the seed division does possess some asset value.
Jewett-Cameron Seed Company owns 12 acres on the edge of North Plains, Oregon, just 18 miles from Portland. Although the real estate value might not be in the millions, it certainly holds some significance. Additionally, the Jewett-Cameron headquarters occupy 5.6 acres, owned by the company, and might also possess embedded value. However, the company has not shown any interest in capitalizing on its real estate holdings through sale and lease-back transactions.
Despite the small losses from the treated wood and seeds segments, Jewett-Cameron remains profitable, generating healthy earnings. For the twelve months ending February 28, 2021, the company reported operating income of $4.6 million and net income of $3.4 million. Notably, the return on average equity stands at approximately 17%.
At $4.50 per share, Jewett-Cameron trades at 5 times trailing net income and an EV/EBIT of 5.0. These figures do not appear unfavorable for a decent little business with a promising outlook and a penchant for returning capital.
The commitment to share repurchases at Jewett-Cameron is expected to continue. In the past, the company was controlled by its co-founders, Donald Boone and Michael Nasser. A decade ago, they directly owned 3.25 million shares (split-adjusted), accounting for 43.8% ownership. Over the years, Mr. Nasser reduced his holdings to a mere 31,888 shares. Meanwhile, Mr. Boone passed away in 2019 but still owned over 1 million shares. His shares have been donated to the Oregon Community Foundation, which now holds a 31% ownership stake in Jewett-Cameron’s shares.
The Oregon Community Foundation is a significant entity with assets totaling over $3 billion. Thus, the $10.7 million worth of Jewett-Cameron shares it holds might seem modest in comparison to its overall investment portfolio. However, the Foundation’s ownership represents a concentrated and illiquid position in a relatively tiny company. Given this situation, it is unlikely for the Foundation to dispose of hundreds of thousands of shares into the market, as doing so would significantly impact the share price. Consequently, the most probable scenario is gradual share repurchases by Jewett-Cameron from its cash reserves and future free cash flow.
In conclusion, Jewett-Cameron Trading emerges as a well-financed and well-managed company, boasting valuable assets and a remarkable track record of rewarding shareholders. While it may face challenges, such as the underperforming segments and the inherent risks associated with small manufacturers and distributors, the financials and investment potential of Jewett-Cameron make it an intriguing and uniquely cool company to consider.
