Summary Thesis:

• Small home and building products company with stable, modest growth and optionality on key segment
• Lawn, garden & pet segment provides stable, core FCF with modest growth
• Industrial wood segment provides upside optionality on boating and other specialty plywood markets
• Management is very shareholder friend and capital allocation is heavily geared toward savvy share repurchases
• Valuation is very attractive

See attached link for charts and tables:  http://www.scribd.com/doc/144510827/JCTCF-Write-Up-Post-Split-VIC

Small home and building products company with stable, modest growth and optionality on key segment

Jewett-Cameron is a small industrial conglomerate that was acquired by an investor group including current CEO Don Boone and Secretary Michael Nasser in 1984.  The business is made up of four segments with one (Lawn, Garden & Pet) contributing the vast majority of the operating earnings. 

There are three aspects to the investment thesis on Jewett-Cameron:

1. The business generates stable and moderately growing earnings and cash flow
2. The business has some optionality on the recovery of its Industrial Wood segment
3. Most importantly, the business is run by a 72 year old CEO who has been in charge for 28 years, who owns 32% of the shares outstanding, who has paid himself a $36,000 annual salary for over a decade and who has repurchased almost 40% of the company in the past two and a half years

Lawn, Garden & Pet segment provides stable, core FCF with modest growth 

The Lawn, Garden & Pet segment manufactures and distributes wood and specialty metal products.   

The wood products consist of fencing and landscape timbers and account for 29% of the segment sales.  The company sources the lumber from independent lumber mills and either sells to other distributors or to home improvement retailers.

The specialty metal products include gates, dog kennels, greenhouses and storage sheds.  The metal products account for 71% of the segment sales and are primarily sold to home improvement retailers.  

While the company does not breakdown the profitability of the different subsegments, metal products have higher gross margins.  The segment is less economically sensitive than residential construction markets and has been a source of moderate growth and a strong earnings contributor. 

Industrial wood segment provides upside optionality on boating and other specialty plywood markets

The Industrial Wood segment – on the other hand- is very economically sensitive and particularly levered to the boating industry.  The segment is a wholesale distributor of specialty wood products, primarily for the boating industry.  The specialty plywood product is predominately used for flooring and panels in recreational boats but also has other uses in transportation (for buses and subway interior flooring) and some limited export market applications. 

The boating industry has been severely impacted by the recession with industry volumes falling to multi-decade lows.  Accordingly, segment sales into the boating industry have decreased substantially and the segment is not generating any meaningful profits.  An eventual rebound in the boating industry is likely to happen at some point so management has maintained the production capacity to participate in a recovery, but management does not believe that a recovery will occur within the next few years.  Other industry sources believe that a limited recovery may be possible sooner than that.

At its peak, the Industrial Wood segment provided over $1.7 million in EBIT compared to break-even currently.  While the outlook for the boating industry remains weak, the company has had some limited recent success in exporting their specialty plywood with YTD sales up 11% year-over-year and the segment showing a modest operating profit. 

The segment is fully cash flow sufficient and provides upside optionality in the event of a recovery in the boating or transportation markets or further management success in finding new applications for their specialty plywood.

Management is very shareholder friend and capital allocation is heavily geared toward savvy share repurchases

As mentioned earlier, the most interesting aspect to the Jewett-Cameron story is the capital allocation policy of CEO Don Boone. 

Jewett-Cameron Lumber was founded in 1953 as a small lumber wholesaler in Portland Oreland.  Don Boone purchased the company in 1984 from the original shareholders and in the next several years completed several additional acquisitions.  In 1986, Jewett-Cameron purchased an importer and distributor of pneumatic air tools and industrial clamps called Material Supply International (now known as MSI-Pro in the Industrial Tools segment).  In 2000, Jewett acquired a seed and grain processing, storage and brokerage business called Agribiotech (now the Seed Processing and Sales segment).  Lastly, in 2002, Jewett acquired Greenwood Forest Products, a processor and distributor of industrial wood and other specialty building products. 

These business segments are rather unexceptional on their own, but CEO Boone has been able to squeeze exceptional growth out of them – despite several industry headwinds from the largest segment contributor in 2002 – because of exceptional capital allocation and cost control.

Boone’s friendliness towards minority shareholders can be evidenced by the salary he pays himself relative to the value of his holdings. 

A detailed look at the share repurchase activity of the company shows that the company made very attractive purchases – but also shows that despite the substantial recent increase in the stock price – the current stock represents as good a value as it did when it was lower due to the reduced share count and the growth in the business.  With 400k shares remaining on the authorization (representing 26% of the shares outstanding), one could expect the company to continue repurchasing their stock in the open market. 

Valuation is very attractive

As mentioned, Jewett-Cameron’s current valuation is very attractive and does not reflect the industry momentum in its core segments or give credit to management for their capital allocation abilities.

While we think the business is undervalued as a whole, given the disparate nature of the segments, a sum-of-the-parts analysis may be appropriate.  Considering the multiples used:

Lawn, Garden, Pet:  Given the stability of the business and the recent growth (34% and 39% year-over-year growth in the last 2 quarters), we assign a 13.5x earnings multiple

Industrial Wood:  The business has essentially no current earnings but has averaged $0.6 million in operating earnings over the past 10 years, so we assign a 12.5x multiple to that segment and discount it by 10% over 5 years to achieve a normalized valuation

Seed Processing and Industrial Tools:  These segments do not contribute significantly to the overall earnings profile and we value them at 10x LTM earnings

Segment     EBIT    Earnings   Multiple  Value   Discount   PV   Per Share

Lawn          $4.2mm $2.7mm   13.5x     $36.5   0%          $36.5    $11.65

Ind. Wood  $0.6       $0.4        12.5x     $5.2     38%        $3.3      $1.04

Seed + Ind Tools                                                                           $0.75

Net Cash                                                                                       $1.38

Total                                                                                             $14.83

Current Price                                                                                $10.00

Lastly, the Greenwood Forest Products Litigation relates to a lawsuit from the 2002 Greenwood acquisition.  The outcome is unlikely to have a material effect on the valuation but it is appears likely that the company will prevail and may receive a small sum (under $1 million) given the Oregon Supreme Court has ruled in their favor. 

Of course, a sum-of-the-parts valuation may only appropriate if the company is going to crystallize the value of the holdings, which may not happen with Jewett-Cameron.  The more likely outcome may be continued share repurchases by the company – which at the current valuation is very accretive to remaining shareholders.