Is Jargen Corp (JAH) a good stock to buy right now? The consumer goods sector is not a growth sector. Due to market saturation and ingrained consumer habits, consumer goods companies typically grow around GDP plus two or three percent due to stock buybacks. Analysts expect Procter & Gamble Co (NYSE:PG), for example, to grow earnings per share by around 6.68% annually over the next 5 years.
When it comes to growth, Jarden Corp (NYSE:JAH) is the exception to the rule. Jarden revenue is up over 20 fold since the beginning the century, with revenue increasing from $357 million in 2000 to $8.287 billion in 2014. Jarden’s stock is up over 50 fold, increasing from $1.05 a share in 2000 to over $55 a share in 2015. Jarden shares have also done well recently, with the stock up 46.6% in the last 12 months and up 17.48% year to date.
Jarden grows revenues faster than the sector through M&A. Jarden management acquires companies, finds synergies, creates value, and uses the unlocked free cash flow to fund larger acquisitions. Jarden management smartly finances the acquisitions with a mixture of cash on balance sheet, leverage, and common equity so that the company’s debt doesn’t become a problem. Through this loop, Jarden management has delivered outsize returns in the slow growth consumer goods sector.
Jarden Corp (NYSE:JAH) recently announced that it will acquire Waddington Group for $1.35 billion in a deal that will be immediately accretive to EPS, cash flow, and EBITDA margin. Waddington Group is a leading manufacturer and seller of premium disposable tableware. On a combined basis, management believes the deal will increase adjusted EPS by 5% by FY 2016 due to cross selling and elimination of overlapping positions. By financing the deal with a mixture of equity and debt, management expects Jarden’s bank leverage ratio to be 3 or under by year end.
The Waddington Group deal highlights Jarden’s platform value. Because of the Waddington acquisition, Jarden is on track to grow EPS by 10% a year while at the same time maintaining a decent debt/cash flow ratio. Given the many disparate companies in the consumer staples sector similar to Waddington, Jarden’s above-average EPS growth rate through M&A can continue for a long time.
Hedge funds and institutional investors are bullish on Jarden. Three of Jarden’s top five fund stock holders increased their positions in the first quarter. Larry Robbins’ Glenview Capital, Ric Dillon’s Diamond Hill Capital, and Ken Griffin’s Citadel Investment Group all increased their positions from January to March 31. Doug Silverman’s Senator Investment Group kept its position the same while Murray Stahl’s Horizon Asset Management modestly reduced its position by 5%.
We mention the hedge fund holders of Jarden because following hedge fund activity can generate alpha. Our research shows that the 15 most popular small-cap stocks among hedge funds have outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012, and they managed to return more than 144% over the ensuing 2.5+ years and outperformed the S&P 500 Index by over 84 percentage points (read the details here).
Jarden Corp (NYSE:JAH) is undervalued versus its peers. With a forward PE of 17.8, Jarden’s forward PE is lower than the S&P 500’s forward PE of 18 and P&G’s forward PE of 19.66 even though Jarden’s next 5 year EPS growth rate is higher than P&G’s next 5 year growth rate. If management delivers on its target of adjusted EPS of $4 by 2018, we see Jarden shares trading around $80-$88 per share by 2018.
Disclosure: None
