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Given the sharp correction in many stocks, it may soon be a good time for investors to put some beaten-down stocks on their radar screens.

Jamieson Wellness Inc. (JWEL-T) is one such stock.

Year-to-date, the share price of this consumer staples stock has plunged 17 per cent. In late-Feb., the stock became oversold with a relative strength index (RSI) reading below 30. Generally, an RSI reading at or below 30 reflects an oversold condition. However, the share price seems to have found a floor with the stock price stabilizing after the company reported better-than-expected fourth-quarter earnings results.

For 2022, management provided revenue and earnings targets that reflect high single-digit to low double-digit growth. The consensus revenue and earnings estimates have remained relatively stable, rising slightly. However, many analysts have taken a more conservative approach, applying a lower multiple to their models resulting in lower target prices.

The average one-year target price now stands at $42.55, implying the stock may realize a potential total return of approximately 30 per cent, including the 1.8-per-cent dividend yield.

A brief outline on Jamieson Wellness is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Toronto-based Jamieson Wellness manufactures and distributes natural health products including vitamins and minerals, supplements, digestive health products, sleep aids, and herbal extracts. The company’s products are sold in over 45 countries. Management also has plans to enter both Mexico and Vietnam.

The company’s revenue stems from two business segments, its branded business and its strategic partners business.

In 2021, the Jamieson Brands segment represented 76 per cent of total revenue and 90 per cent of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). The Jamieson brand is the best-selling brand by sales in Canada within the vitamins, minerals, and supplements (VMS) market. Other brands include Progressive, Precision, Iron Vegan and Smart Solutions by Lorna Vanderhaeghe.

Through the company’s Strategic Partners segment, Jamieson Wellness co-manufactures products for blue-chip companies. In 2021, this segment represented 24 per cent of total revenue and 10 per cent of adjusted EBITDA.

Investment thesis

  • Market leadership. In terms of sales, Jamieson is the leading brand in VMS in Canada.
  • Consumer focus on health: positive health and wellness trends, aging population.
  • Revenue and earnings growth, albeit decelerating.
  • Inflation protection. Management has been able to pass through higher costs. On the fourth-quarter earnings call, CEO Mike Pilato said, “Every time you do a price increase, it is challenged by retailers. It is never an easy thing to do. But when it’s justified, it’s fact-based, and we have good backup to support that, I think our track record shows that we’re able to successfully get those price increases in. We’re able to get them passed through and we’re able to protect our margins. Our plans for that continue into 2022 and into the future whenever we need to do this.”
  • Dividend growth.
  • Valuation is becoming more attractive given the correction in the share price.
  • In late February, the stock became technically oversold with the share price now stabilizing.
  • Key risks to monitor include: decelerating earnings growth leading to multiple compression, competitive landscape, monitoring potential labour shortages/attrition (on the earnings call, management indicated that this is something they are monitoring but it was not a current problem), and higher input costs.

Dividend policy

The company pays its shareholders a quarterly dividend of 15 cents per share, or 60 cents per share on a yearly basis, equating to a current annualized yield of 1.8 per cent.

Management is committed to returning capital to its shareholders. Since the stock was publicly-listed in mid-2017, the company has announced dividend hikes in Aug. 2018, Aug. 2019, Feb. 2020, Aug 2020, and Aug. 2021.

Quarterly earnings

After the market closed on Feb. 24, the company reported better-than-expected fourth-quarter financial results.

Revenue increased 8 per cent year-over-year to $129.8-million, ahead of the Street’s forecast of $124.5-million with growth from both its branded domestic sales as well as international sales. Revenue from the Jamieson Brands segment grew 11.2 per cent year-over-year to $99.8-million with domestic sales increasing 10.9 per cent and international sales expanding 12.6 per cent led by growth in China. Expansion in China is a key objective by management given that the country is the second largest vitamin market worldwide.

This strength offset weakness from its Strategic Partners segment. Revenue from the Strategic Partners segment declined 1.9 per cent to $30.1-million. However, looking at the full year, revenue from Strategic Partners was up 23.6 per cent year-over-year.

In the fourth-quarter, the company reported adjusted EBITDA of $33.8-million, surpassing the consensus estimate of $32.5-million and up 15 per cent year-over-year. The adjusted EBITDA margin was 26 per cent, up from 24.4 per cent reported last year. Adjusted earnings per share came in at 49 cents, two cents ahead of the consensus estimate, and up 17 per cent year-over-year.

In 2021, revenue increased 11.7 per cent to $451-million, adjusted EBITDA increased 13.8 per cent to $90.4-million, adjusted EBITDA margin improved to 22.2 per cent from 21.8 per cent reported in 2020, and earnings per share came in at $1.32, up from $1.16 reported in 2020. On the earnings call, management indicated that this growth has stemmed from both ‘consumer volume growth as well as dollar growth”.

Looking ahead, in 2022, management expects revenue to be between $474-million and $491-million, which represents between 5 per cent and 9 per cent year-over-year growth, up from $451-million reported in 2021. Adjusted EBITDA is anticipated to come in at between $108-million and $112-million, up from $100.1-million reported in 2021. Adjusted earnings per share is expected to be between $1.42 and $1.48, up between 8 per cent and 12 per cent from $1.32 reported in 2021.

The following day, the share price rallied 0.8 per cent on high volume with approximately 316,000 shares traded, above the three-month historical daily average trading volume of approximately 144,000 shares.

Analysts’ recommendations

This small-cap consumer staples stock is actively covered by 11 analysts, of which nine analysts have buy recommendations and two analysts (BMO’s Peter Sklar and Scotia’s George Doumet) have neutral recommendations.

The firms providing research coverage on the company are as follows in alphabetical order: ARC Independent Research, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Eight Capital, ISS-EVA, National Bank Financial, RBC Dominion Securities, Scotiabank, Stifel Canada and TD Securities.

Revised recommendations

Since the beginning of February, five analysts have revised their expectations.

  • Canaccord Genuity’s Tania Gonsalves trimmed her target price by 50 cents to $45.75.
  • CIBC Capital Markets’ John Zamparo cut his target price to $42 from $44.
  • ISS-EVA’s Anthony Campagna upgraded his recommendation to “overweight” from “hold.”
  • Scotiabank’s George Doumet reduced his target price to $37 from $41.
  • RBC’s Sabahat Khan lowered his target price to $39 from $43.

Financial forecasts

The Street is forecasting revenue of $487-million in 2022, up from $451-million reported in 2021, with revenue expected to rise 6 per cent to $515-million in 2023. The consensus EBITDA estimate is $111-million in 2022, up from $100-million reported in 2021, and anticipated to increase 7 per cent to $119-million in 2023. The consensus earnings per share estimate is $1.47 in 2022, up from $1.32 reported in 2021, and expected to rise 10 per cent to $1.62 in 2023.

Relatively minor top and bottom line revisions have occurred in recent months. Three months ago, the Street was forecasting revenue of $475-million in 2022 and $506-million in 2023. The consensus EBITDA forecasts were $109-million for 2022 and $118-million for 2023. The consensus earnings per share estimates were $1.45 for 2022 and $1.60 for 2023.

Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 12.7 times the 2023 consensus estimate, a level last seen in early-2020 when the news of the global spread of the coronavirus hit the market. The stock is trading below its three-year historical average EV/EBITDA multiple of 14.6 times.

The stock is trading at a price-to-earnings multiple of 20.6 times the 2023 consensus estimate, below its three-year historical average multiple of 24.4 times.

The average one-year target price is $42.55, implying the share price has 28 per cent upside potential over the next year. Individual target prices provided by 10 firms are: two at $37 (from Scotiabank’s George Doumet and BMO’s Peter Sklar), $39, $42, $42.75, $43, $44, $45, $45.75, and $50 (from Stifel’s Justin Keywood).

Insider transaction history

Year-to-date, only one insider has traded shares in the public market.

In a relatively small transaction, executive vice-president – global business development Don Bird invested approximately $40,000 in shares of Jamieson on March 1. He acquired 1,200 shares at a price per share of $33.25, increasing this particular account’s position to 24,918 shares.

Chart watch

The stock began trading on the Toronto Stock Exchange in July 2017, which somewhat limits technical analysis.

Several months ago, in mid-December, the share price was around $40 to $41. Since then, the stock has been in a downtrend. Year-to-date, the share price is down 17 per cent. The stock is holding above strong technical support around $32. On a potential recovery, the share price faces initial major overhead resistance around $36, near its 50-day moving average (at $36.23) and 200-day moving average (at $36.64).

ESG Risk Rating

On the fourth-quarter earnings call, Mr. Pilato stated, “We also committed to a 50 per cent emissions target reduction by 2030 and to establishing a formal action plan to reach net zero by 2050. These goals are aligned to the United Nations Paris Agreement goals. As we enter our 100th year, projects have already begun to help us achieve them. We know this is not going to be simple or straightforward process but as we look to expand our leadership beyond this 100-year milestone, we believe it is the right thing to do, and we welcome the challenge of creating real and positive change.”

According to Sustainalytics, Jamieson Wellness has an ESG (environmental, social and governance) risk rating of 31.9. A rating of between 30 and 40 reflects high risk. This rating is as of April 30, 2021.

According to Refinitiv, the company has an overall ESG score of 37, reflecting a ‘C’ grade. The environmental component received a grade of ‘C minus’, the social component received a score of ‘C’, and the governance component received a grade of ‘C plus’. This data is for the period ending Dec. 31, 2020.

In terms of board composition, there are nine individuals who currently sit on the company’s board of directors, of which four are women.

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