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I am giving the Jewett-Cameron Trading Company Ltd. (NASDAQ:JCTCF) a HOLD rating because their most recent quarter was a bit of a mixed bag of news. Their loss from operations figures have improved significantly between Q2 of 2023 and Q2 for 2024, but their six month loss from operations lost an additional $299,028 in 2024 compared to the first six months of 2023. JCTCF is making large amounts of progress expanding their plywood business segment, which looks promising, but this exciting news is contrasted by the news that, while their inventory turnover is improving, their DSO figures are also growing. That being said when excluding the revenues from JCTCF’s now disbanded seed business, JCTCF saw an 8% growth in year over year sales for 2024’s Q2.
JCTCF is still undervalued from a DCF and liquidation scenario standpoint and management should, over the long term, be able to steer the company into the right direction. With that being said, without any more news on their intentions concerning the sale of their seed processing facility and without a better sense on what profitability in their pet and fencing segment will look like once we reach the cyclically busy season the majority of these products are sold during, I have to issue a HOLD rating on JCTCF.
About JCTCF
JCTCF is a company that operates primarily out of 3 business segments. They make specialty metal products for fencing and pet related products such as kennels. Jewett-Cameron is also a wholesale distributor of industrial wood products for the transportation industry. JCTCF’s third business segment was engaged in selling, processing, and cleaning grass seed but as of December 2023, all of the seed stored by customers in this 105,000 square foot facility used to run this business segment has been moved out and JCTCF has since sold off their equipment related to this operations segment.
A Warning On Trading Microcap Stocks
JCTCF has an $18.33 million market cap, making it a “microcap” stock. Stocks with this small of a market cap often experience lower trading volumes and large swings in price volatility. Depending on how big your position in JCTCF is, you may not be able to sell your entire position all at once. Low trading volumes could also mean you are not able to acquire your desired amount of stock in one trade and may have to slowly accumulate the stock over a period of time.
Trading Data For JCTCF (Seeking Alpha)
Factors That Led To My Previous Buy Rating
In January, I wrote an article on JCTCF and would recommend reading up on it as there is a lot of detailed information on the company that may not be covered in as great of detail in this article so we can delve right into any major changes the company has undergone since then.
I had previously given JCTCF a buy rating based off of several factors. One was JCTCF shutting down its seed process and cleaning facility that had been unprofitable for quite some time. Winding down a company that has been a drag on JCTCF’s net income and gross profit margins should help JCTCF become profitable more quickly.
Reason number two is JCTCF’s property that its former seed processing and cleaning facility sits on. This property is worth much more than what is stated on JCTCF’s balance sheet because JCTCF acquired it in a bankruptcy proceeding in the year 2000. If the land this property sits on gets rezoned to expand the town of North Plain’s Urban Growth Boundary, then JCTCF’s 11.7 acres could be worth upwards of $500,000 an acre, which comes out to around $5.85 million or more.
North Plains, Oregon Urban Growth Boundary Expansion (Red Marking Is The Seed Facility) (City of North Plains)
The last factor that greatly contributed to my previous buy rating for JCTCF was the company’s ability to get rid of its massive inventory pile up from people spending money on their pets during the pandemic before significantly slowing down their spending post pandemic. In 2023 JCTCF was experiencing a much longer inventory turn around period than was normal, however, their products don’t degrade over time so JCTCF should be able to sell through their inventory instead of discarding it. Once there are more positive signs that the company is decreasing the time it takes for them to move inventory, the stock price should see a positive movement upward.
JCTCF’s Progress On My Buy Rating Factors
JCTCF’s gross margins did improve for the first six months of 2024 at 23.1% versus a 22.3% gross margin for the first six months of 2023. This slight increase in gross margin was despite the fact that JCTCF sold off older and slower moving lumber at a discount. This margin increase wasn’t only due to the closing of JCTCF’s seed processing plant however, it was also the result of JCTCF starting to finally work through its pandemic inventory and begin selling some of its newer, lower cost inventory which in turn should continue to lift up their margins in the future.
While JCTCF saw an unprofitable Q2 in 2024, losing $726,687 in income from operations, it is a large improvement over their 2023 Q2 loss of $1.20 million. Net losses for Q2 of 2024 were also improving at $534,145 compared to $972,038 in Q2 of 2023. JCTCF had a bad Q1 in 2024 which had weighed down on its six month losses from operations at $789,224 versus a loss of $6,798 in Q1 of 2023 but, their figures coming into Q2 are finally starting to look promising as they are beginning to sell higher profit margin inventory. Net income is positive for the year so far at $757,395, but this is due to a liability arbitration that had been settled for $2.45 million. Due to JCTCF’s bad Q1 in 2024 their income from operations is worse six months into 2024 than it was in 2023, with a $1.52 million loss in 2024 so far compared to a $1.22 million loss in the first six months of 2023.
JCTCF’s Consolidated Financial Statement For Q2 of 2024 (JCTCF’s 2024 10-Q From Q2)
This seed processing and cleaning facility JCTCF had discontinued operations at last year sits on 11.7 acres in an absolutely stellar location right next to an interchange right outside of the town of North Plains, Oregon which has proposed to expand their Urban Growth Boundary Zone. The City of North Plains had already written up a proposed expansion to this Urban Growth Boundary that included JCTCF’s seed facility within its borders.
It appeared like this expansion was going to pass without much of a fight as it was approved by the city council, but residents banded together to petition the proposal and force the measure onto a ballet. Voters were supposed to be able to vote on the measure this May, but Oregon Governor Tina Kotek signed House Bill 4026 which limits voter input in local zoning decisions. This bill had bipartisan support and passed easily, although land use advocates and some farmers have sued to overturn this new law and asked a judge if they can keep the vote for expanding the Urban Growth Boundary Zone on the ballot this month.
The final reason I placed a buy rating on JCTCF was because of their ability to work through their large inventory without it expiring and their shrinking DSO figures.
JCTCF’s Inventory (JCTCF’s 2024 Q2 10-Q)
In Q2 of 2024, JCTCF’s inventory turnover showed signs of improvement and went from 326 days in Q2 of 2023 to 258 days. Their six month inventory figures aren’t as impressive but still show a good amount of improvement from 248 days in 2023 to 232 days in 2024. The faster JCTCF can turn around their inventory of pet and pet containment products with inflated prices, the faster they can improve their gross margins. While the company looks to be successful at speeding up their inventory turn around, it seems like their customers are starting to take longer to pay for their products. As a result, JCTCF saw its DSO figures slip to 52 for Q2 of 2024 compared to 47 for Q2 of 2023. DSO for the first six months of JCTCF’s 2024 was 47 compared to 37 for the first six months of 2023.
Thoughts On JCTCF’s Buy Rating Factor Progress
JCTCF’s gross margins are beginning to climb, which is encouraging. A gross margin improvement of 23.1% versus a 22.3% margin between the first six months of 2024 and 2023 isn’t an enormous amount of progress, but it is a trend in the right direction. Margins should improve further as JCTCF continues to work through its pandemic level inventories that had been bought at elevated prices. Margins should also improve as JCTCF needs to sell less of its products at a discount as inventory begins to stabilize at appropriate levels.
JCTCF’s 2024 Q-2 loss from operations and the general overview of their current expenses looks more promising and if JCTCF can keep these figures up for the next two quarters, the company looks to be on its way to profitability. If they fail to do so though, the company may find itself in a tough spot as their ability to further reduce expenses may be limited as they have already shut down their seed processing and cleaning operations.
Oregon House Bill 4026 was signed into law in March of 2024 by a vote of 25-3 by the Oregon Legislature. The advocacy group Friends of North Plains Smart Growth has planned to sue to block this bill from going into effect. The residents of North Plains, Oregon had set to vote on May 21st of 2024 on whether or not to expand the Urban Growth Boundary. Oregon House Bill 4026 makes this vote illegal as the state of Oregon has argued this is an administrative, not a legislative action and therefore not subject to voter approval.
A judge has decided to keep the expansion of the North Plains Urban Growth Boundary on the May 21st ballot as lawsuits over the legality of this expansion play out. While I am no legal expert, it does appear that there is a lot of bipartisan support for this expansion and the passing of House Bill 4026 gives me more hope that JCTCF will be able to realize a premium value for its seed processing facility and the property it sits on. With this bill being signed so close to the North Plains May election and with a judge letting the question continue to be asked on the ballot, there is still a chance that a court could strike down House Bill 4026 and uphold whatever the voters decide in the coming weeks. It is because of this that I would want to wait at the very least until voters have approved the North Plains Urban Growth Boundary Expansion before giving a buy rating to JCTCF. If voters reject the expansion, we may just have to see how these lawsuits related to House Bill 4026 play out in court.
The speed-up in inventory turnover also looks promising, but the subsequent slow down in DSO figures has been a little confusing. It seems as though JCTCF is speeding up inventory turnover but taking longer to receive payment for their products. JCTCF doesn’t go into much detail on these figures in their 2024 10-Qs. I did attempt to reach out to management on this issue and if I get a response will be updating you guys in the comments section.
JCTCF’s Line Of Credit Agreement
JCTCF has stated that it is in compliance with all of its financial covenants it is bound to uphold under its line of credit financial agreement that it has with its bank. JCTCF’s bank however, has determined it currently does not meet the criteria to qualify for its bank’s line of credit. Therefore, JCTCF has to enter into another line of credit agreement with another financial institution by May 31st, 2024 while JCTCF’s line of credit with its current bank will expire on June 30th, 2024. The company has said it is currently in talks with several financial institutions and anticipates that it will successfully enter into another credit agreement before the May deadline.
If JCTCF fails to successfully enter into another credit agreement, it could spell disaster for the company. The business has about $1.15 million in cash and cash equivalents on their balance sheet, and their ability to pay for overhead expenses would likely come to a screeching halt if their line of credit dries up. If JCTCF announced they no longer have a line of credit come May 31st, 2024, I would sell this stock.
Conclusion
As JCTCF’s sales are largely seasonal and with the results of the company’s busiest two quarters of 2024 yet to be reported, we are about to learn a lot about the company’s business turnaround in the course of the next six months. As Jewett-Cameron has only made modest be it steady progress on improving its gross margins, has a worse loss from operations for the first six months of 2024 compared to 2023 but, with drastically better Q2 2024 results when compared to its results in Q2 of 2023, it is hard to say for sure what direction JCTCF is moving in. The company’s busier seasons should begin to paint a clearer picture on if JCTCF can continue to keep this up.
The business also needs to show a better correlation between inventory turn over and DSO figures. Moving product faster but taking longer to get paid for that product in an environment where people are beginning to worry about if and or how long consumer spending can hold up in an environment with both high interest rates and high inflation should be some cause for concern. These DSO figures may be the first signs of cracks in the consumer being translated through the companies that sell discretionary products to them. On top of all of this, JCTCF may end up with a worse line of credit agreement than they had previously. The interest rates from this new line of credit may be more severe, and the total line of credit may even decrease. If they fail to obtain a new line of credit altogether, it would be absolutely devastating for JCTCF’s businesses, and I am having a hard time imagining how they would be able to continue operating. Until JCTCF enters into a new agreement and discloses the new agreement’s terms, the entire situation remains entirely uncertain.
All of these uncertainties around JCTCF currently leads me to give the company a HOLD rating. Positive news of any of these developments I’ve mentioned above should give ample cause for the stock price to rise but with the Urban Growth Expansion of North Plain’s future not entirely certain yet, longer DSO figures, and the uncertainty of what a new line of credit agreement might look like for JCTCF, I think the smart thing to do currently is wait for more information.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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