Lassonde is a Juic Potentially

Lassonde Industries Inc. (TSX:LAS.A, Financial) is the largest producer of fruit juices and beverages in Canada and one of the leading producers of store brand shelf stable beverages in the United States. The company has 17 factories in North America and an extensive distribution system for its branded products in Canada. As the fruit juice market in Canada is still quite fragmented, the company continues to grow by making acquisitions.

Lassonde also makes fruit-based snacks, cranberry sauce and other cider-based drinks.

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The stock has sold over 60% from its all-time high in 2018 and is down 45% from the high in 2021. The shares are trading at 8x average core free cash flow de Lassonde over five years (see operating cash flow table below).

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Financial indicators

Operating profit (EBIT) in 2021 was approximately C$118 million ($88.85 million). Given the company’s enterprise value of approximately C$1 billion, this equates to an enterprise value to Ebit ratio of less than 9. Lassonde’s median 10-year enterprise value to Ebit ratio was above 14. Therefore, a return to normalized enterprise value/Ebit would mean an increase of more than 35%. The stock looks very cheap and the company is buying back shares aggressively.

Financial results are stable, with high single-digit operating margins and consistent cash generation. Recent performance has been negatively impacted by inflation, causing margins to squeeze and the stock to fall. As shown in the graph below, operating profit and operating margins are below trend. I expect them to come back as the business adjusts to inflationary pressures.

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With the exception of the post-pandemic period, the company’s base free cash flow (adjusted for working capital) has grown steadily at a compound annual growth rate of over 6%.

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In addition, Lassonde’s balance sheet as at June 30 shows a low long-term debt of $156 million.

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Control

The company was created more than 100 years ago from a Quebec fruit stand and is still controlled by the Lassonde family through high voting B shares, which are not traded.

Lassonde’s book value has steadily increased in double digits over the long term. Family control provides the business with good capital allocation and management.

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Conclusion

Lassonde could be an excellent low-risk opportunity in a recessionary environment. It has low leverage and a strong balance sheet.

Additionally, the valuation panel suggests the stock is cheap on an absolute basis.

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Due to the emergence of inflation, stocks have traded lower due to passing emissions, but I believe they will recover as Lassonde adjusts its prices to restore profitability. The business has been boring but steady for the past 30 years and I expect that trend to continue. The company boasts a decent scale, wide distribution, and retailer relationships. Plus, he pays a decent 2.5% dividend, which grows, and redeems his shares.

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