Description

John Bean is a perfectly good company that is being valued as a great one.  It is comprised of two distinct segments-- Foodtech, which makes processing equipment for food processors (poultry processors, vegetable canning, etc.) and Aerotech, which makes boarding bridges for airports.  Both these businesses have been growing around 5% recently, but are highly cyclical-- it took until 2014 to re-attain 2007 revenue levels, and that included some acquisition activity.

While the market clearly liked today’s earnings, they seemed lackluster to me:

• 5% earnings beat, but they have beat by 10-50% since 2013, so I would view this as a negative.  Also beat by .04 but left q4 guidance in-line with street.

• 1% rev beat, also very low by historical standards, and partly consensus was too low since analysts didn’t update for 2 intra quarter acquisitions (9m of newly acquired revs in the quarter; they beat by 4m).

• Receivables up 20m, inventories up 20m sequentially.

• Backlog ok, but book/bill 1.0 in food (flat sequentially), 1.2 in aero (down from 1.3 last quarter).  Given the acquisitions, backlog should have grown.  Backlog/revs for food is actually declining last few quarters, while aerospace is up in last few quarters but flat with a year ago.  Food is a higher multiple so the net of this is negative.

If you back out food acquisitions in the last 8 quarters, my calculated growth rate for their core food business is below management’s stated organic growth:

It is tough to find comps for their Aerotech group, but I think this is clearly just an OK business—their customers are airlines after all.  I have generously applied 15x LTM EBIT here to get a value of $540m.  This implies the remaining foodtech business is being valued at 27.5x forward EBIT, a healthy premium to comps at 12-17x EBIT.  If this division were valued at 17x, the stock would trade at $70:

In my mind, there was nothing surprising or exciting about today’s earnings release, and the stock should retrace.  Longer-term, investors should question why they are paying record multiples on peak earnings:

The author of this idea and/or a private fund managed by the author’s firm had a [short] position in this security at the time of posting and may trade in and out of this position without informing the SumZero community.

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Catalyst

insider selling

sell-side downgrades (avg target price of $109)

cycle turns