Tuesday, January 25, 2011

Jewett Cameron: Timely Buybacks

Companies can and do destroy shareholder value by buying back stock when it is overvalued. Indeed, most companies seem to be poor allocators of capital on behalf of shareholders, choosing to buy stock or take on debt when it is expensive, and hoard cash when it should be investing. But there are companies out there who do it right, and the value they add for shareholders is tremendous! Consider Jewett-Cameron (JCTCF), a stock that has been previously discussed as a potential value investment.

In its latest quarter, Jewett-Cameron reported a loss of just under $1 million. The company's operations actually produced a small profit in the quarter, but the overall loss was the result of a court decision in the quarter for a matter that occurred back in 2003. As a result, the company added a $1.5 million reserve as a liability on its balance sheet. While this is not nearly enough to threaten the company's viability (the company has no debt and $7+ million of cash), the company only has a market cap of $18 million; as such, this lawsuit can have a significant effect on the company's intrinsic value.

But surprisingly, the shares of this company likely became not less but more valuable to value investors this quarter, despite the unfavourable court ruling. This is because the company bought back a huge number of shares this quarter at attractive prices. Over the course of the quarter, Jewett-Cameron spent $2.4 million (a fraction of its cash holdings) to buy back 15% of its outstanding shares. Excluding the cash balance from the company's market cap and the lawsuit charges to the company's earnings, Jewett-Cameron has a ttm P/E of about 6!

And the company is not yet done with the buybacks. Along with its quarterly report last week, the company also announced that it was initiating another share repurchase plan. The plan is scheduled to end in May, and is for another 17% of the company's outstanding shares!

Investors wondering why this management team is so bent on creating shareholder value rather than behaving like most other management teams should look at Jewett-Cameron's ownership structure. The company is owned by its managers, particularly its CEO. For this reason, agency costs are minimized as managers are likely to engage in actions that are beneficial to shareholders.

Disclosure: Author has a long position in shares of JCTCF

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