JCTCF -- “Da Bulls” -- Part I

The entire bullish case for JCTCF hinges on the growth of the company’s non-wood products division which is part of the company’s Lumber, Building Materials & Other (JCLC) group. I believe the non-wood products business is a hidden asset and will allow the company to grow the bottom line despite the slowdown in demand for commodity wood products.

There has been several headlines in 2007 that provide a glimpse that things are happening with non-wood products. For example, in January the company announced that it will sell its high-end dog kennels in 900 Petsmart stores. A few weeks later the company announced that they acquired patents and manufacturing rights to a vinyl gate system -- another non-wood product. In February, the company announced that Fred Myer will sell the high end dog kennels in 117 stores.

Here is another positive announcement related to non-wood products in March:

JCTCF “announced that the Company has received initial orders from two large national home centers for the Company's proprietary gate system for wood fences”

That’s a lot of positive headlines that have gone basically unnoticed as the stock is essentially flat year to date. Keep in mind that at the end of 2006 the P/E ratio was at only 12x-13x for a company with ROE north of 15% and almost zero leverage.

Headlines are one thing, but what do the numbers look like?

Here is where things get interesting. EPS for the last nine months (the fiscal ends in August) is $0.57 vs. normalized eps of $0.57 for the same period in fy2007 (the normalization removes a 16c gain in last years figures due to sale of a distribution facility).

So, what’s so great about investing in a company with zero earnings growth? Consider the fact that earnings are still flat while

1) this company sells wood products and the cost of lumber has plummeted. I don’t have exact statistics and JCTCF did not give any numbers in their latest filling but if you were to look at the latest filling from UFPI which I am a shareholder and have mentioned before you would see that lumber prices have fallen by at least 15% year-to-date.

2) its most profitable business segment last year (Greenwood) has experienced a 17% YoY sales decline and profits for that segment are down almost 50%

3) the company made no money in the “industrial tools” business which accounted for 4c of earnings last year at that time

When you consider that all these notable items have been completely offset by the more than doubling of profits in the JCLC segment and that all that increase was driven by non-wood products a different pictures start to emerge.

For the first nine months of the year, sales in JCLC are up only 2% while operating income for the unit is up 140% …..here is the single most important line from the 10Q

“this reflects a sizable increase in specialty metal products that slightly more than offset a sizable decrease in wood products sales. Operating income was up $889,886 [+140% YoY] reflecting the fact that the gross margin on specialty metal products is much higher than on wood products sales.”

I guess I am not sure what else I can say to get my point across.

When you buy shares of JCTCF you are getting a fast growing business segment with a huge potential market that is currently stuck in a middle of a pile of garbage. My bet is that either that garbage will be swept away over the next few years (lumber prices return back to normal levels) revealing the great business segment within. Or the business will continue to grow so much that it will be noticed while still surrounded by garbage.


* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.