Jamieson Wellness (TSE:JWEL) is a Canadian manufacturer and distributor of high-quality natural health products within the consumer staples industry, offering a comprehensive product line of vitamins, minerals, and supplements, generating the majority of their revenue. They have a second revenue stream derived from their strategic partners’ segment, in which they offer consulting and product development services to blue-chip consumer health companies and retailers around the world.
Long History of success
Founded in 1922, they have a trusted reputation and have developed strong industry relationships, leading to a strong global supply chain based on long-standing relationships. In recent years, the focus of the company had intensified on accelerating company growth through constant innovation and the strategic acquisition of various companies. This rapid growth has been fueled by their recent IPO, as they gained listing on the TSX in July of 2017.
Jamieson is currently trading at $19.44, with a large potential upside of 24.5% growth. In their most recent quarterly annual reports, the income statement exhibited an increase in revenue of 8% and a 5% increase in gross profit, leading to a gross margin of 35.03% (4.02% above industry average) and a 562.40% increase in year over year quarterly earnings growth. As a company, they are working to increase manufacturing and operations efficiencies to minimize expenses, demonstrated by a 13.6% decrease in general expenses, resulting in a 50.65% increase in net income from continuing operations.
New Debt load still manageable
The company has taken on significant debt in the recent year and increased expenses caused by high variable compensation costs due to their acquisition of health companies Body Plus and Sonoma. This debt has not negatively impacted their liquidity, as they still hold a quick ratio of 0.85 and a current ratio of 1.72. Current market estimations reflect bullish opinions for the future of the company and their stock outlook. Analysts estimate their EPS will increase from 0.52 to 1.03 by the end of 2019. Furthermore, revenue is expected to grow 10% in the upcoming year and earnings are predicted to spike by over 21%, leading to a strong projected appreciation in share price in the following year – because if Jamieson trades at similar multiples long-term, company growth will fuel capital gains and cause a surge in the share price.
Strong Position in growing segment partnered with expanding product-line
VMS and sports nutrition are two of the biggest and fastest growing areas of the consumer health industry. Jamieson holds a dominant position with a 25% market share and has both the capability and history of defending their position through acquisition. They have developed an innovation-focused strategy to capitalize on long-term trends, translating to a successful track record of growing revenues faster than competitors in recent years. Given the economic climate, their expansion and diversification into foreign markets and their natural experience as an aged company will insulate them from risk, and drive growth. From an investor’s perspective, there is a scarcity of strong Canadian consumer staples companies to invest in. Meaning, that as Jamieson continues to grow, they will attract more investors, magnified by the natural attraction to consumer staples stocks in poor economic climates.
Aggressive growth and acquisition strategy
Jamieson Wellness currently distributes products in 10,000 locations across Canada and over 40 countries worldwide, and are continuing to enter international markets. They recently entered a 5-year distribution agreement with MedPlus, the second largest pharmacy chain in India, and are currently expanding into China as well. This will broaden and diversify their revenue streams and allow access to major markets with significant revenue potential. More importantly, it may attract attention from foreign investors looking for a safer investment in consumer staples, driving up the share price. With a market cap of just over $800M, they have a lot of room for growth and increase in value as a company.
Market overreaction to Earnings miss
Jamieson’s stock has a tendency to experience large downswings, most notably a 30% drop, following the release of their 2018 earnings report, as they fell short of their projected revenue target and investors are worried about slowing growth. Short term sales declined due to the transition as two sales forces were integrated to increase long-term sales coverage. Their main flagship brand still grew in the double-digit range. Company management has adjusted their strategy to leverage off their international and domestic momentum and narrowed their ranges for revenue, to ensure they surpass earnings expectations in the upcoming quarter. The sales miss caused an overreaction in market opinion, but their core business and expansion strategy still remain strong. In 2018, they still managed to outperform their sector by 20.4%. Though they trade at a fairly high EV/EBITDA of 20.85, that multiple is projected to remain within the same range. If their earnings are to grow by 21%, as projected, their share price should increase by a similar amount if the EV/EBITDA multiple remains within the same range and the company maintains their runway for growth. Due to their growth strategy and recent acquisitions, their growth potential is not reflected within their current share price, meaning they are currently undervalued on the market. The overarching growth of the company’s stock will be on an upward trend.
They currently have a very high PE ratio of 28.33 (dropped from around 34 in early 2019). This is misleading as their EPS was fairly low in 2018 due to heavy investment in international expansion and acquisition, inflating their PE ratio. In the upcoming year, their PE is estimated to drop further to 24.77, caused by an increase in EPS and an improvement in capital structure from progressively paying off debt as the company expands its cash flows.
- Exchange rate fluctuations
- Increased competition and new entrants
- Rising legal/license fees
- High valuation risk if growth slows
- Growing health trend for new age demographics
- Continued international expansion
- Lack of VMS in foreign markets
Ultimately, Jamieson is a company built to succeed and should be a strong company to invest in for the remainder 2019, as they are likely to demonstrate growth and provide investors with solid returns even in a shaky economic climate.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.