Value Library

The following is an excerpt from the ABC Perspective - January 2007 - Pg. 3

CANAM GROUP

Canam Group can trace its history back to 1960 with the founding of the Canam Steel Works, a 12,000 square foot facility in Quebec. Over the years, the Company broadened its interests to include the manufacture of steel joists and decking, semitrailers and logging equipment, composite flooring, bridges and pre-engineered buildings. With the appointment of Marc Dutil to the position of President and Chief Operating Officer in 2003, the Company began a serious restructuring effort. The logging equipment and semitrailer divisions were sold, along with several underperforming plants.

In early 2006, Canam’s share price moved sharply higher on the back of some excellent financial results. In fiscal 2005, the Company earned $38.7 million or $0.96 per share, compared to a loss of $5.9 million or $0.17 per share the previous year. The return to profitability was achieved through sales growth of 4.8% to $711.5 million, despite the negative impact of the strengthening Canadian dollar. Gross profit increased 49% to $175.1 million and EBITDA grew to $93.7 million, up more than 70%. Marc Dutil’s focus on the bottom line, through cost control and emphasis on higher margin, value-added products produced tangible results.

Unfortunately, the shares began to languish after the first quarter of 2006. Marcel Dutil, Chairman of the Board, CEO and father of Marc, had been trying to sell a large amount of his stock since April. When “the Street” knows that a large block is available investors typically demand a significant discount to the market price. Canam’s stock slowly drifted lower from the $11.00 level. Thankfully, on December 20, Canam reported that the sale of Mr. Dutil’s 3,500,000 share block at $8.75 had been successfully completed. It is important to note that Marcel Dutil still holds 8,018,541 shares, or approximately 16.4% of the Company.

Looking at the metrics, we can see why Mr. Dutil was so reluctant to part with stock at a discount. Currently, Canam trades at only 9.4 times 2006 consensus earnings and approximately 8.5 times 2007 consensus earnings. At 1.3 times book value and 6 times EBITDA, the stock is relatively undervalued. The attractive valuation is supported by a positive outlook with good visibility. Recent contract wins include an $11.5 million order for a casino in Alberta and two warehouses in Quebec, a $40 million contract to supply steel for the New York Yankees’ stadium and a $70 million contract for the New York Mets’ new ballpark. In fact, Canam’s backlog has increased to $297 million from $226 million, a 31% increase year over year. We look forward to a solid 2007 from this Company.

JOHN B. SANFILIPPO & SONS

On December 15th, 2006 John B. Sanfilippo (JBSS) reported fiscal 2007 first quarter results which included a loss of approximately $4.8 million, or $0.41 per share. It is important to note, however, that JBSS’s past year’s results reflect the impact of higher tree nut prices, particularly almonds, which resulted in lower than normal gross margins. Fortunately, we are now in a new crop year. Tree nut prices have declined considerably and inventories have returned to more reasonable levels.

The Company has also announced that it will no longer purchase almonds directly from growers and will discontinue its almond handling operations in Gustine, California. We feel this was a good management decision as it will reduce the commodity risk that had a significant negative impact on fiscal 2006 results. Moreover, it will also reduce labour costs and free up working capital requirements. In turn, the Company can use this increased liquidity to pay down debt, repurchase shares, purchase other nut types or increase its spending on product research and development.

In the meantime, shares of JBSS have rallied from their September low of $9.78 and now trade at around $12.20 per share. Nevertheless, we think the shares still offer meaningful upside. For instance, JBSS currently trades at a 25% discount to its $16.56 book value, a figure that likely understates the value of its real estate and does not account for the value of its Fisher brand. In addition, its shares sell at an attractive multiple to our estimate of future earnings.

We calculate that if JBSS can return its net margin to its five year average of around 2.5% it could eventually earn as much as $1.35 per share based on fiscal 2006 sales. In addition, we believe that gross sales should improve in 2007 through increased promotional activity from retailers, as well as the introduction of new products such as Fisher Fusion, a line of flavored almonds. We believe these improvements could push sales through $600 million and restore JBSS’s net margin to historic levels. Ultimately this could be the necessary catalyst to propel JBSS shares to previous cycle highs.

Irwin A. Michael, CFA