1. CFA Institute Research Challenge
hosted by
CFA Society Philadelphia

2. CFA INSTITUTE RESEARCH CHALLENGE 31 JAN 2014
Market Profile
Market Cap $1.66 Billion
Recent Price $87.69
52-week
High
$97.80
52-week low $67.28
Shares
Outstanding
18.8 million
Average
Daily Volume
53,560
Institutional
Holdings
66.3%
ROE 13.0%
ROA 9.8%
P/E 24.14
TEV/EBITDA 10.4x
TEV/Sales 1.69x
Source: Bloomberg, S&P Capital IQ
Figure 1: JJSF total returns vs. ^RUA & S5CONS
Source: S&P Capital IQ
Highlights
• We initiate coverage with a buy recommendation and a price
target of $106.00, or 21% above the recent trading price.
• JJSF is a defensive growth stock that can continue to grow faster
than the industry through both price and volume increases. A
strong balance sheet affords the company the ability to continue
making strategic acquisitions that can be successfully synergized into
existing operations and provide additional leverage.
• Targeting niche markets enables JJSF to consistently report
operating metrics above its peers. By establishing a leading position in
these categories, JJSF is able to combat the negative competitive
forces in various markets and position itself for sustained above
average growth and profitability.
• Proven management that is shareholder friendly. Since initiating a
dividend policy 2005, JJSF has increased its annual dividend at a
compound annual growth rate (CAGR) of 19.9%. JJSF recently
announced a doubling of its dividend for 2014, but our estimated
payout ratio still has JJSF remaining in the lower 90
th
decile in this
category. Strong cash flow generation and balance sheet suggest
continued annual increases in the dividend are likely.
Important disclosures appear at the end of this report
J & J Snack Foods Corp.
Ticker: JJSF GICS Recommendation: BUY Estimated Upside
Exchange: NASDAQ Sector: Consumer Staples Target Price $106.00 20.88%
Industry: Food, Beverage, & Tobacco Price as of
Sub-industry: Packaged Foods and Meat products Jan. 29, 2014: $87.69
FCFF sensitivity analysis
EBIT growth rate (%)
7 8 8.5 9 9.3 9.5 10 11 12.5
5 $86.53 $88.83 $89.99 $91.17 $91.89 $92.36 $93.57 $96.02 $99.78
10 $93.15 $98.50 $101.29 $104.15 $105.91 $107.09 $110.12 $116.42 $126.54
-­‐100
0
100
200
300
400
500
Return(%)!
JJSF!
Russell 3000 Index!
S&P 500 Consumer Staples
Index!

3. Figure 2: Shareholder Structure
Source: Bloomberg
Figure 3: Revenue by Product
Source: Company Data
Figure 4: Facility Locations
Business Description
JJSF manufactures nutritional snack foods and distributes frozen
beverages that it markets nationally to the food service and retail
supermarket industries
1
. JJSF targets niche categories where it can be
one of the preeminent players and has with operations in the United
States, Canada and Mexico. Headquartered in Pennsauken, New
Jersey, JJSF was established in 1971 by Gerald B. Shreiber when he
acquired the assets of J&J Pretzel Co. at auction for $72,100. Shreiber,
who is currently the CEO, Chairman of the Board, and President, has
grown a company that dealt solely in soft pretzels with $400,000 in
sales to a publically traded snack food conglomerate with $867.7
million in sales in fiscal 2013.
The whole is greater than the sum of its parts.
JJSF has developed a diverse line of snack foods including soft
pretzels, frozen beverages, and various other baked goods. They have
three market segments: Food Service, Retail Supermarkets and
Frozen Beverages. The Food Service segment consists of soft
pretzels, frozen juice treats and desserts, churros, dough enrobed
handheld products and baked goods including various cookie products.
The Retail Supermarket segment is made up of frozen and prepackaged
products that are purchased by consumers for consumption at home.
Some of the products included in the Retail Supermarket segment are
SuperPretzel Soft Pretzels, Luigi’s Real Italian Ice, Whole Fruit frozen
fruit bars and sorbet, ICEE Squeeze-Up Tubes, and Patio burritos. The
Frozen Beverage segment sells frozen beverages such as ICEE and
Slush Puppie to the food service industry. The company is focused on
developing new and innovative products, further penetrating into
existing market channels, and expanding established products into new
markets.
Experienced management with a history of excellent execution
Though the board and management team have seen some changes
over the years, the core culture and principles remain in place that have
enabled JJSF to report its 42
nd
consecutive year of record sales and
profitability this past fiscal year. Other members of management include
CFO Dennis G. Moore, who has held this title in addition to other roles
since June of 1992, and Robert M. Radano, who has been the COO
since May 1996. Moore and Radano joined JJSF in 1984 and 1972
respectively, displaying management’s commitment in the success and
longevity in the company. Other members of the BOD bring valuable
experience to JJSF in freight transportation, warehousing, third party
logistics, marketing, manufacturing, commercial and investing banking,
and frozen beverages.
1
J & J Snack Foods 2013 10K
36%
30%
5%
20%
9%
29%
Institutional!
Institutional Mutual Fund!
Mutual Fund!
Insider!
Retail!
21%!
11%!
7%!
6%!
32%!
15%!
8%!
Soft Pretzels! Frozen Desserts & Treats!
Churros! Handheld!
Bakery Products! Frozen Beverages!
Other!

4. Figure 5: Porter’s 5 Forces Analysis
Figure 6: Peer Group and Sub-industry
Capital Structures
Source: S&P Capital IQ
Source: S&P Capital IQ
Industry Overview and Competitive Positioning
Rivalry in the packaged food and meats industry is strong. Product
differentiation tends to be more perceived than actual – this is why some
companies spend so much on marketing in an attempt to convince customers
that their products truly are “one of a kind.” Switching costs between brands
within the category are also very low. Moreover, most firms tend to incur
significant fixed costs due to factory expenses and storage costs, the later of
which tend to arise because of the perishable nature of their products. The
threat of substitute products is extremely high. Convenience plays a
large role because packaged snack foods are widely available and consumers
are likely to choose a product based on location and accessibility. Price also
plays a large role, and consumers are more likely to choose the lowest price
option when it comes to snack foods.
This high threat of substitutes means that JJSF’s strategy of achieving
leadership in niche categories has the potential to end up being less profitable
as one might initially expect. JJSF’s is not just competing with other firms that
make similar products (e.g Snyder’s-Lance, Inc. [NasdaqGS:LNCE]), but rather
a whole host of snack food companies like The Hershey Company
(NYSE:HSY), Diamond Foods, Inc. (NasdaqGS:DMND), Unilever plc
(NYSE:UL), and ConAgra Foods, Inc. (NYSE:CQB)
2
. Moreover, Mr. Shreiber
has commented previously that for certain products he considers his primary
rival to be smaller, regional players – something that certainly makes sense
when you consider regional bakeries and the fact that JJSF’s largest product
segment is still bakery goods, not pretzels (appendix 11).
The bargaining power of suppliers in the packaged food and
meats industry is weak. There are many suppliers of the raw materials that
JJSF and other corporations’ use as their inputs, and because of this they tend
to be competitively priced. The biggest source of supplier power comes in the
form of switching costs, which may be significant depending on how complex
and intergraded the relationship is. Buyer power strength depends on
who you consider to be the “buyer.” End consumers are extremely
fragmented and have little power; however, the ones who actually
decide whether or not to sell JJSF’s products (retailers, fast food chains,
etc.) are far fewer in number and wield significant power.
Health and nutrition have become key drivers for the industry
In a recent survey Deloitte and Touche LLP found that 79% of executives
believed that nutrition was the main driver of the packaged food industry
3
. JJSF
has witnessed the push toward healthier products first hand. Since losing
contracts with schools around the nation, JJSF has formulated new recipes to
make their snacks healthier. The lack of nutritional value has not impacted sales
as greatly as earlier anticipated, but JJSF has reformed their recipes to cater to
America’s issue with obesity. In the most recent quarterly earnings call, Gerry
Shreiber, the CEO, mentioned that JJSF has started to sell their products in
schools again.
2
This, along with JJSF’s unique business model is why we decided to ultimately focus on
comparing the company to peer group statistics.
3
Deloitte and Touche LLP - Food and Beverage 2012: A Taste of Things to Come
0
2
4
6
Threat
of
New
Entrants
Bargainin
g
Power
of
Suppliers
Bargainin
g
Power
of
Buyers
Rivalry
in
the
Industry
Threat
of
SubsGtute
Products
Debt!
43%!Equity!
57%!
Peer Group!
1%
9%
4%
3%
1%
11%
9%
4%
2%
3%
11%
15%
17%
10%
Figure 8: Sub-indusrty debt ratings! AA!
AA-!
A+!
A-!
A!
BBB+!
BBB!
BBB-!
BB+!
BB!
BB-!
B+!
B!
B-!
Debt!
38%!Equity!
62%!
GICS Subindstury!

5. Impulse buys + deliberate purchases
= strong sales growth
Almost everywhere you go it is possible to find one of
JJSF’s products ( see figure 12). This convenience
factor enables JJSF to capitalize on “impulse buys” in
additional to deliberate purchases. This also helps
create familiarity with JJSF’s numerous brands and
potentially engender consumer loyalty.
Figure 9: Revenue growth sensitivity to GDP
Source: The Federal Reserve, S & P Capital IQ
Figure 10: Returning Capital to Shareholders
Source: S&P Capital IQ, Team calculations & forecasts
Figure 11: Peer group cash and marketable securities
Investment Summary
Attractive Valuation and Strong Fundamentals
Our intrinsic value estimate is derived from historical operational performance
and what we consider to be reasonable estimates with an eye towards
conservatism in order to embed a margin of safety in our estimates. Using
trailing twelve-month data we value the stock at $106 per share, or 21% above
the recent share price of $87.69.
Outstanding Operating Performance
Since going public, JJSF has been able to consistently deliver impressive
operational metrics and outperform most peers in terms of growth and
profitability. This has been achieved primarily through its strategic initiative of
focusing on niche product categories where it can be a category leader. Due to
the current management team, market opportunities, and category positioning,
we believe these trends are likely to continue.
Sound Financial Position
JJSF currently has over $215 million in cash and marketable securities (the vast
majority of which are available for sale), or $11.54 per share – $5.66 of which is
cash and cash equivalents. This accounts for over 32% of total assets, which is
the second highest percentage among our peer group. Although this is currently
hurting operational performance measures and overall growth, when combined
with its strong cash flow generation, this provides the firm with ample cash to
deploy when attractive investment opportunities present themselves in addition
to continuing to return cash to shareholders.
Bucking the trend
Research has found that most firms only destroy shareholder wealth through
acquisitions
4
. But as both its historical operational performance metrics and
stock price performance can attest to, JJSF has done an excellent job of not
falling trap to overpaying for growth. Cumulative gains on bargain purchases are
actually larger than impairment charges – $6.6 million vs. $1.2 million.
Management is steadfast in its commitment to waiting until an attractive
opportunity presents itself before pulling the trigger, thereby enabling the firm to
continue to have an ROIC well above the peer group median.
Shareholder Friendly Management
Since initiating a dividend in fiscal 2005, JJSF has increased its dividend each
year at a CAGR of almost 20% (12.5% if you exclude the recent doubling of the
dividend this past November). This means that anyone who purchased the stock
prior to the end of July in 2009 has a current yield of 3% on shares of a
company that has consistently grown faster than the industry and. This has
resulted in impressive total returns for investors who have reinvested their
dividends see figures 1 and 12. Of the 31 companies in JJSF’s peer group that
currently pay a dividend, JJSF is currently tied for 28
th
place with a yield of 1.5%
and our forecasted 2014 payout ratio is well below the peer group median. We
believe continued annual increases are very likely.
4
Moeller, Schlingemann, & Stulz (2003) found that in a sample of 12,023 acquisitions shareholders of
these firms lost a total of $218 billion when acquisitions were announced. A KPMG study (1999) found
that this underperformance tends to persist over time.
-­‐5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
1999
2001
2003
2005
2007
2009
2011
Percent Change in GDP!
Percent Change in Revenue!
0%
20%
40%
60%
80%
100%
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
Dividends per Share!
Payout Ratio!
12.5%
CAGR!
Figure 12: Settings where JJSF products can be found
• Business Dining • Military
• Club Stores • Movie Theatres
• Colleges & Universities • National Restaurant Chains
• Convenience Stores • Regional Restaurant Chains
• Healthcare • Schools K-12
• Independent Restaurants • Sports & Entertainment
• In Store Bakery • Supermarket & Grocery
• Mass Merchants • Theme & Amusement Parks
Source: J&J Snack foods
0!
2!
4!
6!
8!
10!
12!
14!
16!
18!
20!
0%!
5%!
10%!
15%!
20%!
25%!
30%!
35%!
40%!
USD!
Cash & Marketable Securities/Total Assets!
Cash and Marketable Securites per Share!
JJSF

6. CFA INSTITUTE RESEARCH CHALLENGE 31 JAN 2014
Figure 13: JJSF stock price and key acquisitions from 2004 to today
2!
3!
4!
5!
6!
7!
8!
1990! 1995! 2000! 2005! 2010! 2015! 2020!
ln Revenues !
( USD mm)!
Figure 14: Modeling Revenues!
Predicted!
Actual!
20!
30!
40!
50!
60!
70!
80!
90!
Jan-04! Jan-05! Jan-06! Jan-07! Jan-08! Jan-09! Jan-10! Jan-11! Jan-12! Jan-13! Jan-14!
Acquires assets
of New York
Pretzel!
Acquires assets of
Kim & Scott's
Gourmet Pretzels!
Acquires Frozen
Handheld from
ConAgra Foods!
Acquires
Radar, Inc.!
Acquires
Slush Puppie!
Acquires ICEE
of Hawaii, Inc.!
Acquires
SnackWorks
LLC!
Acquires Country
Home Bakers!
10.0%!
10.5%!
11.0%!
11.5%!
12.0%!
0!
200!
400!
600!
800!
1,000!
1,200!
1,400!
USD mm!
Figure 15: Forecasting EBIT margin!
Revenue!
Total Operating
Expenses!
EBIT Margin!
Long-term margin
forecast!

7. CFA INSTITUTE RESEARCH CHALLENGE 31 JAN 2014
Figure 16: Valuation Summary USD mm
Present value of FCFF in high growth phase 384.30
Present value of terminal value 1,423.89
Value of operating assets 1,808.19
Value of Cash & Equivalents 215.41
Value of firm 2,023.60
Value debt 39.31
Market value of equity 1,984.29
Value of Equity in options 6.16
Value of Equity in common stock 1,978.13
Share price $105.91
Source: Team Estimates
Figure 17: FCFF Inputs
Growth Period High Low
Growth rate 9.30% 2.75%
Adjust debt ratio 2% 24%
Beta 0.78 1
Risk-free rate 2.67% 2.67%
Equity risk premium 5.29% 5.29%
After-tax cost of debt 3.07% 3.26%
Tax rate 36% 35%
Adjusted ROC 18% 11%
Adjusted reinvestment rate 40% 25%
Source: Team Estimates
Figure 18: Cost of Debt
Source: Bloomberg, Team Estimates
DCF Valuation
• Model: We choose to use a FCFF model over a FCFE model because
we believe that the likelihood of JJSF changing its capital structure in
order to optimize its cost of capital by the end of its high growth phase
is a far more reasonable assumption than the alternative, i.e. remaining
debt free into perpetuity. JJSF currently has less debt, in the form of
lease obligations, than all but one other peer group constituent. In an
attempt to derive a more accurate estimate of JJSF’s intrinsic value the
follow adjustments to the company’s GAAP metrics were made:
o Operating leases were capitalized to account for off balance
sheet financing and added to the present value of capital
leases to find the current present value of debt.
o Employee options were valued using the Black-Scholes
model and the present value subtracted from the value of
equity.
• Sales: JJSF’s small size and penchant for purchasing business that can
easily be folded into its current operations has enabled it to
consistently grow faster than the industry average. We anticipate that
this will continue for at least ten years and will due to both volume and
price increases.
• Margins: We are forecasting for continued EBIT margin expansion due
to the operational leverage afforded by increasing production volume,
albeit at a much slower rate than the historical average – only 77 basis
points to 12% by the end of our high growth period. Though above the
industry median, our belief is that JJSF leadership positioning in niche
categories will enable it to achieve margins that are higher than those
competing in the more competitive segments of the GICS sub-industry.
This results in EBIT growing at a CAGR of 9.3% during our high growth
period.
• WACC: The cost of equity was found using the CAPM model. An
equity risk premium was calculated by using a two-stage dividend
discount model to discount the forecasted dividends and buybacks on
the S&P 500 and set the current value of the index equal to its intrinsic
value. The implied equity risk premium was used in favor of a historical
approach as research has shown that the current implied ERP has a
higher correlation with future ERPs.
5
The current yield on the 10-year
US government bond was used as a proxy for the risk-free rate. A
bottom-up beta was utilized to minimize the standard error of the
estimate and was calculated using the peer average (corrected for
cash) and JJSF’s current tax rate and leverage ratio (adjusted for
leases)
6
. Given that JJSF currently has no publicly traded debt,
estimating a pre-tax cost of debt was calculated by creating a synthetic
rating and using the current corporate spread over the U.S. 10-year
Treasury. We assigned JJSF with a S&P synthetic rating of BBB and
added the current spread corporate spread of 1.54%.
5
Damodaran (2013) Equity Risk Premiums (ERP): Determinants, Estimation and Implications The
2013 Edition
6
Our estimated beta is actually the same as the Bloomberg 5-year regression beta using weekly data.
Risk Free Rate 2.67%
Synthetic Rating BBB
Spread 1.54%
Pre-tax cost of debt 4.21%

8. Figure 19: Return on Invested Capital
Source: Company data, Team calculations
Figure 20: Segment Revenues and Operating Margins
Source: Company data, Team calculations
• We assumed that metrics would revert towards peer median levels
during the stable phase. Constituents for peer comparisons were
selected using Value Line – all US based publicly traded firms in Value
Line’s food processing industry were included in peer group
calculations.
Multiples Analysis
Historically JJSF has traded at a TEV/EBITDA discount to both the GICS
sub-industry and its peer group. We find this to be unwarranted due to its
above average growth, lower leverage, and well above average returns on
invested capital; and believe this lends additional support to our view that the
stock is currently undervalued, and perhaps even a reason why the security is
underpriced. Given that this runs contrary to an earnings yield comparison,
we suspect that the market is currently focusing more on earnings than the
underlying strength of the business in question – an unfavorable comparison
for firms who have below average leverage.
Figure 22: TEV/EBITDA comparison
Source: S&P Capital IQ
Figure 23: Earnings yield
Source: S&P Capital IQ, Team calculations
0%!
2%!
4%!
6%!
8%!
10%!
12%!
JJSF! Peer Median!
GAAP TEV/EBITDA
CY2009 CY2010 CY 2011 CY 2012 Latest
JJSF 6.8x 7.8x 8.1x 8.6x 12.1x
GICS sub-industry 10.0x 9.5x 10.3x 11.1x 11.7x
Peer group 10.2x 14.9x 10.1x 11.5x 12.5x
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
100
200
300
400
500
600
700
800
900
1,000
2001
2003
2005
2007
2009
2011
2013
USD
mm
Frozen Beverages! Retail Supermarket!
Food Service! Food Service OM!
Retail Supermarket OM! Frozen Beverages OM!
JJSF OM!
0%!
2%!
4%!
6%!
8%!
10%!
12%!
14%!
16%!
18%!
JJSF! Peer median!

9. Source: S&P Capital IQ, Team calculations
Figure 24: Return on Equity
Source: S&P Capital IQ, Team calculations
Figure 25: Cash Conversion Cycle
Source: Company Data, Team calculations
Financial Analysis
5-way DuPont Decomposition Analysis
At first glance JJSF’s ROE doesn’t appear to be anything noteworthy as it has
stayed relatively close to both the GICS sub-industry and peer group medians.
However, after doing a 5 way DuPont Decomposition we were left quite
impressed. This is because the only thing preventing JJSF from having a ROE
that is far higher than the average for this industry is its lack of leverage. In fact,
JJSF has asset turnover, operating margin, and interest burden ratio have
remained significantly above the peer group median since 2008 (JJSF’s tax
burden has oscillated around the peer group median). Were the firm to readjust
its capital structure in the near future so that it had leverage and interest burden
ratios equal to the industry average JJSF’s ROE would rise north of 19%
assuming it could invest its newly raised capital in equally profitable projects.
(Please see appendix 10 for a charts of all the components of the DuPont
decomposition).
Figure 26: DuPont Decomposition
Peer
Median
JJSF
Current
JJSF with
Peer Median
Tax
Burden
6.48%
63.88%
63.88%
Interest
Burden
90.95%
103.48%
90.95%
Operating
Margin
9.73%
11.23%
11.23%
Net
Profit
Margin
5.73%
7.42%
6.52%
Leverage
Ratio
2.13
1.26
2.13
Asset
Turnover
1.08
1.39
1.39
ROE
13.23%
12.98%
19.28%
Source: S&P Capital IQ, Team Estimates
Cash Conversion cycle weakening, but still better than the peer average.
Prior to 2010 JJSF’s cash conversion cycle was one of the best in its peer
group; however, an increase in days inventory on hand and decrease in days
payables outstanding have served to pull up JJSF’s cash conversion cycle
towards the peer group median. The latter appears to be a prudent use of some
of JJSF’s excess cash, but the former bears watching. In 2011 inventories
increased by 25%, 60% of which was driven by higher unit costs of inventory
and inventory of handhelds
Strong growth in cash flow
JJSF has grown its unlevered TTM free cash flow by at an impressive CAGR of
13% over the past 10 years. This cash flow, when combined with the assets
already on place on the balance sheet, provide the firm with ample cash to
invest in growth assets or return to shareholders through dividends and
buybacks.
11%
12%
13%
14%
2009
2010
2011
2012
TTM
JJSF! GICS subindustry!
Peer goup!
25
30
35
40
45
50
CCC
DSO
DPO
DIH
Peer
median
3-Year CAGR
Revenue Net Income
JJSF 7.6% 10.0%
GICS sub-industry 5.2% 0.0%
Peer Group 7.0% 6.3%

10. Figure 27: Quarterly LTM Unlevered Free Cash Flow
Source: S&P Capital IQ
Figure 28: YoY Change in Segment Sales
Source: S&P Capital IQ
Figure 29: Drivers of segment sales growth
42 years of record revenues and profitability
For JJSF, the year 2013 was a record year in terms of revenue, net income, and
earnings per share. The Company’s soft pretzel brands grew by over 18% and
contributed a record $145,030,000 to revenues in 2013 – though handhelds do
still remain the companies single largest product segment by accounting for
32% of total sales to external customers. The repair and maintenance category
continues to be a steady source of cash from the Frozen beverages segment,
while the Retail Supermarket segment continue to experience headwinds as
sales decreased 5% on a YoY basis, adjusting for the extra week in fiscal 2012.
We anticipate the retail segment will stabilize and return to growth in the first
half of our high growth period in our DCF model. We expect net income to
continue to increase at a faster rate than the top line as JJSF continues to cut
costs and increase operational leverage.
Investment Risks
Market Risk: Change in insider ownership
Since we like to see management teams have “skin in the game,” we are
pleased to see that insiders have a significant stake in the company. However, it
must be noted that Gerald Shreiber currently controls the vast majority of insider
3,678,745 shares, or 20% of shares outstanding
7
. We would become concerned
if were to see insiders begin to reduce their ownership in the company as this
could serve to put downward pressure on the stock by significantly increasing
the float. Currently free float shares as a percentage of shares outstanding is
79.6%. For perspective the peer group median is 95%.
Operational Risk: Overpaying for growth
When firms seek to grow though acquisitions there is always a risk firm will end
up overpaying and destroying shareholder wealth. Though we applaud JJSF’s
management team for ability to resist the temptation to do so, investors must
remain cognizant that the majority of deals do not end up creating shareholder
wealth.
Operational Risk: Recent financial statement developments
persist over time
JJSF’s accruals tend to be higher than its peer group and have shown
considerable variability over the years, with large spikes occurring in 2004 and
2012. Though this does not currently concern us since large spikes have
historically been followed by a regression towards the peer median, if the spike
seen in 2012 is not accompanied by future decreases in the ratio we would
certainly become concerned as research has found a high level of total accruals
to be correlated with both an increased frequency of earnings restatements and
negative abnormal returns around said restatements
8
. The deterioration of
aggregate accruals recently is due in large part to the increase in accounts
receivables. This also holds true for the separation between the growth rates for
revenues vs. accounts receivables and operating income vs. cash flows from
operations (please see appendix 10).
7
J&J Snack Foods Corp., (2014) Form DEF14A
8
Richardson, Tuna, and Qu (2002) Predicting Earning Management: The Case of Earnings
Restatements
- !
10 !
20 !
30 !
40 !
50 !
60 !
70 !
USD mm!
0%
5%
10%
15%
20%
25%
30%
2004
2006
2008
2010
2012
Food Service! Retail Supermarket!
Frozen Beverages!
0%
25%
50%
75%
100%
2010
2011
2012
2013
Food Service!
Volume
Price
-­‐100%
-­‐50%
0%
50%
100%
2010
2011
2012
2013
Retail Supermarket!
Volume
Price

11. Figure 30: Aggregate Accruals
Figure 31: Spot and Future Commodity Prices
January 1, 2009 – July 29, 2014
Source: S&P Capital IQ
Operational Risk: Loss of major customers
JJSF relies on large customers for several of their products, including
distributors such as Costco and restaurant chains such as Taco Bell. If they
were to lose one or more of these large customers, it would have a materially
negative impact on their current operations. Most purchasing decisions are
made based upon consumer demand as well as the pricing of JJSF’s products,
not contractual agreements, so this poses a relatively significant risk to their
business. This also serves to increase the concentration of risk in their accounts
receivable.
Operational Risk: Management turnover
Were Mr. Shreiber or other key executives to leave unexpectedly or without
having a groomed replacement for the newly vacated position we would have to
reconsider our thesis since we attribute much of the firms’ prior success to the
abilities of JJSF’s management team.
Operational Risk: Unanticipated spike in input costs of Commodity
Prices
Since raw materials such as wheat, sugar, and various dairy products
are key inputs in many of JJSF’s products, there is always the risk that
an unanticipated spike in certain commodities could have a sizable
negative impact on margins.
Economic Risk: Risks Associated With Foreign Operations
Although JJSF is currently minimally involved in foreign operations, we currently
see this as a potential catalyst for additional upside. However, the opposite is
also true as venturing into new markets in foreign countries presents a hosts of
new challenges that must be over come in addition to the added foreign
exchange rate risk.
-15%!
-10%!
-5%!
0%!
5%!
10%!
15%!
20%!
25%!
30%!
Peer median! JJSF!
3!
5!
7!
9!
11!
Wheat (CBOT) Future Contracts!
Wheat (CBOT) Historical Pricing!
0.05!
0.15!
0.25!
0.35!
0.45!
Sugar #11 (ICE) Future Contracts!
Sugar #11 (ICE) Historical Pricing!

12. Appendix 1: Income Statement
(USD mm except per share items)
Income Statement 2011 2012 2013 2014E 2015E
Revenues 744.07 830.80 867.68 928.19 1003.13
COGS 514.30 580.61 604.4 643.60 695.10
Gross Profit 229.77 250.19 263.28 284.59 308.03
Gross Profit Margin 30.88% 30.11% 30.34% 30.66% 30.71%
SG&A 152.70 164.80 166.50 178.20 192.50
Profit from Sales 77.07 85.39 96.78 106.39 115.53
Other Operating Expenses/(Income) 0 0.1 -0.7 0.00 0.10
Operating Income (EBIT) 77.07 85.4 97.4 106.39 115.43
EBITDA 106.99 116.02 130.66 144.42 159.62
EBITDA Margin 14.38% 13.97% 15.06% 15.56% 15.91%
Depreciation & Amortization 29.92 30.62 33.26 38.03 44.19
Interest Expense (income) 0.9 (1.3) (3.4) (4.13) (4.20)
EBT Excl. Unusual Items 77.97 86.7 100.80 110.32 119.63
Merger & Related Restructuring Charges -0.5 -0.2 0.00 0.00 0.00
Restructuring Charges 0 -0.2 0.00 0.00 0.00
Impairment of Goodwill 6.6 0 0.00 0.00 0.00
EBT Incl. Unusual Items 84.1 86.3 100.8 110.32 119.63
Income Tax Expense 29.0 32.2 36.4 39.81 43.41
Effective Tax Rate Percentage 34.50% 37.28% 36.12% 36.09% 36.29%
Net Income 55.1 54.1 64.4 70.51 76.22
Net Income Margin 7.41% 6.51% 7.42% 7.60% 7.60%
Basic Earnings Per Share (EPS) $2.95 $2.87 $3.43 $3.77 $4.11
Diluted Earnings Per Share $2.93 $2.86 $3.41 $3.75 $4.09
Dividend Per Share Growth Rate 9.30% 10.64% 23.08% 19.90% 21.03%
Dividends Per Share $0.47 $0.52 $0.64 $0.77 $0.92
Payout Ratio Percentage 15.51% 17.64% 17.81% 17.98% 18.08%

13. Appendix 2: Statement of Financial Position
(USD mm)
Balance Sheet (in millions) 2011 2012 2013 2014E 2015E
Cash & Cash Equivalents 87.48 154.20 97.35 115.70 139.83
Short-Term Investments 25.51 1.21 0.26 0.17 0.11
Accounts & Notes Receivable 75.00 76.41 87.55 95.27 105.58
Inventories 63.46 69.76 71.79 80.93 92.84
Other Current Assets 8.40 6.48 7.79 7.01 6.45
Total Current Assets 259.85 308.06 264.74 299.08 344.81
Property, Plant, & Equipment 446.86 483.87 510.44 547.20 597.56
Accumulated Depreciation 322.21 342.33 363.29 385.39 416.54
Net Plant, Property, & Equipment 124.65 141.54 147.15 161.81 181.02
Goodwill 70.07 76.90 76.90 79.40 83.57
Other intangible Assets 52.00 48.46 44.01 40.79 38.63
Marketable Securities Held to Maturity 42.00 25.00 2.00 1.51 1.18
Marketable Securities Available for Sale - - 107.66 107.66 107.66
Other 2.24 3.07 3.21 3.97 5.00
Total Intangible Assets 166.31 153.43 233.78 233.34 236.04
TOTAL ASSETS $550.81 $603.03 $645.67 $694.23 $761.86
Liabilities & Shareholders' Equity
Current Liabilities $75.85 $81.51 $83.24 $87.76 $94.28
Accounts Payable 55.92 59.65 50.91 50.38 50.86
Short-Term Borrowings 0.28 0.34 0.21 0.21 0.21
Other Short-Term Borrowings 19.65 21.52 32.12 39.08 48.33
Total Current Liabilities 75.85 81.51 83.24 89.66 99.39
Long-Term Borrowings 0.52 0.35 0.14 0.09 0.06
Other Long-Term Liabilities 42.06 45.71 45.72 52.01 60.21
Total Long-Term Liabilities 42.58 46.06 45.86 52.10 60.27
Total Liabilities $118.43 $127.56 $129.10 $139.18 $152.84
Total Equity 432.39 475.49 516.57 $572.05 $644.93
Total Preferred Equity - - - - -
Minority Interest - - - - -
Share Capital & APIC 45.02 43.01 34.52 33.70 33.58
Retained Earnings & Other Equity 387.37 432.48 482.05 540.43 616.69
TOTAL LIABILITIES & EQUITY $550.81 $603.03 $645.67 $711.01 $797.17

14. Appendix 3: Statement of Cash Flows
(USD mm)
Statement of Cash Flows (In Millions) 2011 2012 2013 2014E 2015E
Net Income 55.06 54.12 64.38 70.51 76.22
Depreciation & Amortization 29.86 30.65 33.25 38.03 44.19
Other Amortization 0.38 0.29 0.30 0.30 0.30
(Gain) Loss From Sale Of Assets 0.05 -0.1 0.13 - -
Asset Writedown & Restructuring Costs -6.6 - - - -
Stock-Based Compensation 0.92 1.25 1.87 2.34 2.92
Other Operating Activities 6.11 3.11 0.07 0.11 0.15
Change in Acc. Receivable -5.20 -0.60 -11.10 -11.85 -10.18
Change In Inventories -6.30 -6.50 -1.80 -4.20 -5.13
Change in Acc. Payable 4.28 5.25 0.58 1.03 1.25
Change in Other Net Operating Assets 1.87 1.98 -1.10 -1.03 0.21
Cash Flow from Operating Activities 80.46 89.43 86.55 95.24 109.94
Capital Expenditure -29.10 -42.80 -35.80 -40.23 -42.35
Sale of Property, Plant, and Equipment 0.39 1.04 1.20 1.22 1.27
Cash Acquisitions -8.81 -7.90 - 3.25 -
Invest. in Marketable & Equity Securt. -25.7 41.29 -85.9 5.00 10.00
Other Investing Activities -0.60 -1.00 -0.30 -0.42 -0.42
Cash Flow from Investing Activities -63.90 -9.30 -120.80 -31.18 -31.50
Dividends Paid -8.54 -9.55 -11.47 -13.27 -14.10
Change in Short-Term Borrowings - - - - -
Increase in Long-Term Borrowings - - - - -
Decrease in Long-Term Borrowings -0.24 -0.31 -0.34 -0.33 -0.33
Increase in Capital Stocks 5.38 4.23 3.95 2.61 2.55
Decrease in Capital Stocks 0 -8.17 -14.50 -16.11 -17.33
Other Financing Activities -0.33 0.41 -0.20 -0.20 -0.20
Cash from Financing Activities -3.74 -13.39 -22.56 -27.30 -29.41
Net Change In Cash 12.82 66.74 -56.81 36.76 49.03

15. Appendix 4: Ownership Summary
36.40%!
29.90%!
4.60%!
20.48%!
8.70%!
Ownership Summary!
Institutional Stock Ownership! Institutional Mutual Fund Ownership!
Mutual Fund Ownership! Insider Ownership!
Other (Retail Investors)!
Total Shares Outstanding:
18,678,012!

16. Appendix 5: Key Financial Ratios
2011 2012 2013 2014 E 2015 E
Liquidity
Current Ratio 3.4258 3.7795 3.1802 3.24 3.30
Quick Ratio 2.5892 2.9237 2.3178 2.32 2.32
Margin Analysis
Gross Margin 30.88% 30.11% 30.35% 30.37% 30.40%
EBITDA Margin 14.38% 13.97% 15.06% 15.07% 15.09%
EBIT Margin 10.37% 10.28% 11.23% 11.24% 11.26%
Earnings from Cont. Ops Margin 7.40% 6.51% 7.42% 7.43% 7.46%
Net Income Margin 7.40% 6.51% 7.42% 7.60% 7.60%
Levered Free Cash Flow Margin 5.16% 5.12% 5.51% 5.56% 5.58%
Unlevered Free Cash Flow Margin 5.17% 5.12% 5.52% 5.56% 5.58%
Asset Turnover
Total Asset Turnover 1.438 1.440 1.390 1.39 1.4
Fixed Asset Turnover 6.339 6.242 6.011 6.09 6.04
Accounts Receivable Turnover 10.272 10.974 10.584 10.59 10.62
Inventory Turnover 9.016 8.716 8.540 8.41 8.49
Total Debt/Equity 0.19% 0.14% 0.07% 0.07% 0.08%
LT Debt/Equity 0.12% 0.07% 0.03% 0.03% 0.03%
ROE 12.74% 11.38% 12.47% 12.33% 11.83%
ROA 10.00% 8.97% 9.97% 9.92% 9.56%
Solvency
Debt to Equity 27.39% 26.83% 24.99% 24.33% 23.70%
Financial Leverage
Interest Coverage Ratio 85.633 65.692 28.647 25.7908 27.48398

17. Appendix 6: Equity Risk Premium Calculation
S&P 500 Dividends & buybacks
TTM
80.33
Current index value 1774.2
Cash yield on index 0.0453
Enter expected growth rate in
earnings for next 5 years for
market
0.0564
Current risk free rate 0.0267
Expected stable growth rate 0.0267
Period 1 2 3 4 5
Expected dividends 84.87 89.65 94.71 100.05 105.7
Expected terminal value 2050.2
Present value 78.61 76.92 75.27 73.6421057 1469.77
Implied Risk Premium in current level of Index 0.0529
Source: Damodaran (2014)

18. Appendix 7: Converting operating leases into debt
Converting Operating Leases into debt
Year Commitment Present Value
(In thousands)
1 $8,556.00 $8,210.34
2 7,545.00 6,947.69
3 5,820.00 5,142.74
4 4,805.00 4,074.33
5 3,072.00 2,499.62
6 and beyond 5,207.33 11,711.62
Debt Value of leases = $38,586.35
Number of years embedded in year 6 estimate 3
Depreciation on operating lease asset $4,823.29
Adjustment to operating earnings $3,266.71
Adjustment to total debt outstanding $38,586.35

19. Appendix 8: FCFF Summary Dollar Amounts in USD mm
Period 1 2 3 4 5 6 7 8 9 10 Terminal Year
Expected Growth Rate (%) 9.30 9.30 9.30 9.30 9.30 7.97 6.65 5.32 4.00 2.67 Terminal Year
Cumulated Growth (%) 109.30 119.46 130.58 142.72 155.99 168.43 179.63 189.19 196.75 202.00
Adjusted Reinvestment Rate (%) 57.17 57.17 57.17 57.17 57.17 50.77 44.38 37.98 31.59 25.19
Adjusted EBIT 113,214 $23,743 135,251 147,829 161,577 174,461 186,059 195,961 203,792 209,233
Tax rate (for cash flow) 36.01 35.90 35.79 35.67 35.56 35.45 35.34 35.22 35.11 35.00 35.00%
EBIT * (1 - tax rate) $72,444 $79,320 86,849 95,092 104,117 112,616 120,311 126,935 132,236 136,002 142,089.14
- (CapEx-Depreciation) 34,819 38,137 41,771 45,750 50,109 $48,356 45,448 41,430 36,404 30,530 31,181.02
-Chg. Working Capital 6,598 7,212 7,882 8,615 9,417 8,825 7,944 6,782 5,363 3,727 4,609.36
Free Cash flow to Firm 31,027 33,972 37,196 40,727 44,592 55,435 66,919 78,723 90,469 101,745 106,298.76
Cost of Capital (%) 6.69% 6.69% 6.69% 6.69% 6.69% 6.67% 6.65% 6.63% 6.61% 6.59%
Present Value 29,080 29,843 30,626 31,430 32,254 $37,589 42,547 46,940 50,600 53,389
Present value of FCFF in high growth phase $383,298.64
Present value of terminal value of firm $1,423,889.87
Value of operating assets of the firm $1,808,188.51
Value of cash, marketable securities & non-operating assets $215,413.00
Value of firm $2,023,601.51
Market value of outstanding debt $39,309.35
Market value of equity $1,984,292.16
Value of equity in options $6,160.62
Value of equity in common stock $1,978,131.54
Market value of equity/share $105.91

20. Appendix 9: Autoregressive model used to forecast revenues
ln(salest) - ln(salest-2) = 0.04798 + 0.43933[ln(salest-1) - ln(salest-3) + et
Regression Results
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 0.04798 0.01532 3.13038 0.00351 0.01685 0.07907
X Variable 0.43934 0.15319 2.86773 0.00695 0.12832 0.75033
0 !
500.0 !
1,000.0 !
1,500.0 !
2,000.0 !
2,500.0 !
USD
mm
Modeling Revenues: Actual vs. Predicted!
Actual!
Predicted!

21. Appendix 10: Assessing earnings quality
-­‐0.6
-­‐0.4
-­‐0.2
0
0.2
0.4
0.6
0.8
1
Growth
in
operaGng
income
vs.
Growth
in
cash
flow
from
operaGons
OperaGng
Income
Cash
from
Ops.
-­‐10.00%
-­‐5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
Revenue
growth
vs.
Growth
in
accounts
receivable
Revenues
Accounts
Receivable

22. Appendix 10: DuPont Decomposition Analysis
0!
0.5!
1!
1.5!
2!
2.5!
3!
Leverage Ratio!
JJSF
Peer
median
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Asset Turnover!
0%!
2%!
4%!
6%!
8%!
10%!
12%!
Operating Margin!
0%!
20%!
40%!
60%!
80%!
100%!
120%!
Interest Burden!
54%!
56%!
58%!
60%!
62%!
64%!
66%!
68%!
70%!
72%!
Tax Burden!

23. Appendix 11: Product performance
Sales to External Customers
Food Service 2008 2009 2010 2011 2012 2013
Soft pretzels $99,784 $99,471 $100,694 $103,943 $118,014 $145,026
Frozen juices and ices 51,206 50,272 47,273 49,740 53,813 48,831
Churros 25,286 29,404 31,732 41,583 45,974 56,099
Handhelds 8,865 27,818 26,488
Bakery 217,398 229,371 234,032 241,288 266,192 274,783
Other 6,520 9,235 23,228 18,143 9,451 9,532
$400,194 $417,753 $436,959 $463,562 $521,262 $560,759
Retail Supermarket
Soft pretzels $27,559 $30,506 $30,463 $32,044 $33,842 $34,597
Frozen juices and ices 31,742 37,819 48,288 51,940 53,673 48,077
Handhelds 9,424 24,358 22,528
Coupon redemption (2,722) (3,753) (3,399) (3,857) (3,222) (3,681)
Other 533 586 767 1,548 1,217 818
$57,112 $65,158 $76,119 $91,099 $109,868 $102,339
Frozen Beverages
Beverages $113,903 $112,983 $128,125 $133,372 $135,436 $132,274
Repair and maintenance service 38,803 42,013 40,410 42,608 49,115 52,813
Machines
sales 14,794 11,729 11,964 11,362 13,136 17,376
Other 2,918 2,154 2,279 2,068 1,979 2,122
$170,418 $168,879 $182,778 $189,410 $199,666 $204,585
0%!
5%!
10%!
15%!
20%!
25%!
30%!
35%!
40%!
2008! 2009! 2010! 2011! 2012! 2013!
% of !
total sales!
Largest Contributors to Sales to External Customers!
Frozen juices and ices! Churros!
Soft pretzels! Bakery!
Beverages! Repair and maintenance service!

24. Appendix 12: Market Risk Matrix

25. Disclosures:
Ownership
and
material
conflicts
of
interest:
The
author(s),
or
a
member
of
their
household,
of
this
report
does
not
hold
a
financial
interest
in
the
securities
of
this
company.
The
author(s),
or
a
member
of
their
household,
of
this
report
does
not
know
of
the
existence
of
any
conflicts
of
interest
that
might
bias
the
content
or
publication
of
this
report.
Receipt
of
compensation:
Compensation
of
the
author(s)
of
this
report
is
not
based
on
investment
banking
revenue.
Position
as
a
officer
or
director:
The
author(s),
or
a
member
of
their
household,
does
not
serve
as
an
officer,
director
or
advisory
board
member
of
the
subject
company.
Market
making:
The
author(s)
does
not
act
as
a
market
maker
in
the
subject
company’s
securities.
Disclaimer:
The
information
set
forth
herein
has
been
obtained
or
derived
from
sources
generally
available
to
the
public
and
believed
by
the
author(s)
to
be
reliable,
but
the
author(s)
does
not
make
any
representation
or
warranty,
express
or
implied,
as
to
its
accuracy
or
completeness.
The
information
is
not
intended
to
be
used
as
the
basis
of
any
investment
decisions
by
any
person
or
entity.
This
information
does
not
constitute
investment
advice,
nor
is
it
an
offer
or
a
solicitation
of
an
offer
to
buy
or
sell
any
security.
This
report
should
not
be
considered
to
be
a
recommendation
by
any
individual
affiliated
with
the
CFA
Society
of
Philadelphia,
CFA
Institute
or
the
CFA
Institute
Research
Challenge
with
regard
to
this
company’s
stock.
CFA
Institute
Research
Challenge