A consumer goods stock to buy

Jamieson Wellness manufactures branded natural health products including vitamins, minerals, and supplements. CIBC World Markets says it’s an “outperformer”.

jamieson_wellness

Jamieson Wellness is enjoying domestic and international growth in the vitamins, minerals and supplements industry.

Hoping to inject health into your bank account too, Toronto-based CIBC World Markets analysts Matt Bank and Mark Petrie began coverage of consumer goods stock Jamieson Wellness Inc. (TSX—JWEL) with an “outperformer” rating.

Finding the company’s core Canadian business features steady organic growth with ample operating leverage, Messrs. Bank and Petrie see limited downside. They go on to highlight the company’s strong domestic base, saying Jamieson has momentum in numerous international markets, and impressive early indicators suggest expansion in the dynamic and large Chinese market. The analysts give the stock a $27 target share price.

Going into further detail the analysts note: “Jamieson has a dominant market share in Canada, and a history of outpacing peers with innovation and good performance through downturns. Demographics and VMS [vitamins, minerals and supplements] category expansion are favourable trends, and Jamieson is well-positioned in regards to private label and e-commerce.”

International sales growing at 30 per cent

“International is 10 per cent of sales (more on earnings) and growing at approximately 30 per cent. This is driven by continued success within markets, the addition of new markets, and a build-out in China—all of which we believe are sustainable drivers. We view International as a potential source of outperformance should efforts to develop a domestic Chinese business prove successful.

“Despite Jamieson’s approximately 25 per cent market share in a mature VMS industry, we believe continued growth is achievable for several reasons: Canada has an aging population, and older people spend more on VMS. Jamieson’s large market share and trusted brand reputation allow it to participate in this industry growth.

“Sports nutrition is growing at eight to nine per cent, versus VMS overall at three per cent. Gummies, powders (e.g., protein and collagen), and probiotics are expanding the VMS market beyond traditional products. The category is benefitting from the broader popularity of the fitness, wellness, and self-care industries.

“The acquisition of Body Plus in 2017 delivered protein powder manufacturing, and Jamieson has launched additional products to play these trends. An example is the 2018 launch of Jamieson Essentials Plus Protein, which combined protein powder, a multivitamin, a probiotic, and omega-3, used in smoothies and foods.”

Building out India and US markets

“Assuming international sales land near the high end of 2019 guidance (as management has indicated for overall revenues), they would only have to grow at 10 per cent per year for 2020 and 2021 to hit the mid-point of IPO guidance and 13 per cent to hit the top end. Given an impressive pace to date and the growing momentum from the foray into China, we view these outcomes as highly achievable.

“India and the US are two other markets worth highlighting. In India, Jamieson signed an agreement with a top pharmacy chain last year. We expect further disclosure on this build-out in the coming quarters.

“As for the US, despite the close proximity, Jamieson has been cautious about entering its branded market due to high barriers to entry in physical retail. But e-commerce—and strong relationships with partners like Amazon—enables a lower-risk avenue. We do not include this opportunity in our numbers, but it is an interesting prospect that we expect to hear about in the near term.

“International growth has been robust and relatively diversified. Management guided to 14 to 16 per cent annual growth at IPO, but 2018 results and 2019 guidance are for approximately 30 per cent growth, driven by multiple regions. Over the past eight quarters, Asia has been called out positively five times, Europe six times, and the Middle East four times. While there is limited disclosure and it is difficult to gauge the relative importance of these regions, we view the momentum in multiple geographies in a favourable light.

“Jamieson could further expand its capabilities in these growing categories through acquisitions. Jamieson has strong, consistent, and growing margins. Benchmarking against global health & wellness and CPG peers, Jamieson’s margins are right in the middle of this high-margin group, with a straighter upward trend.

“Jamieson is a solid dividend stock, having already raised its dividend twice as a public company, and offers a reasonable yield of 1.8 per cent. The payout ratio has been approximately 60 per cent of free cash flow, which we expect to drop to approximately 40 per cent in 2020 and beyond, leaving ample room for debt paydown. On earnings per share, the payout ratio (percentage) is in the low-40s.”

This is an edited version of an article that was originally published for subscribers in the November 1, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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