J M Smucker Co Stock Is a Sweet Deal

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The first thing that might come to mind when talking about J M Smucker Co (NYSE:SJM) is its iconic jams, jellies and peanut butters (which make for a great peanut butter and jelly sandwich!). But SJM is so much more than just a condiment manufacturer, and that’s why I see good value in the name right now.

SJM Stock: J M Smucker Co Stock Is a Sweet Deal

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First, Smucker’s largest segments by sales are actually retail coffee and pet brands. The coffee division markets under the Folgers and Café Bustelo brands, and it also sells K-Cups under these names as well as Dunkin’ Donuts.

Pet brands includes products like Milk Bone and Pup-Peroni treats for dogs, Kibbles ‘n Bits dog food, as well as Meow Mix and 9Lives cat food. It also offers Nature’s Recipe high-end pet foods.

The company remains a solid, if not fast-growing, business, even though it has had a tough go of it over the past year and a half. SJM achieved record results in fiscal 2016 and soared as high as $155, but the stock got ahead of itself and sank when fiscal 2017 earnings disappointed due to price drops in the coffee and pet segments.

While management did a good job controlling costs, by the time fiscal fourth-quarter results rolled around SJM had fallen to $126, and then slipped further following the release of its 2018 fiscal first-quarter report. Folgers and Crisco volumes were under pressure, and while pet foods’ volumes were higher, this was offset by lower prices.

EPS sank 19% from $1.86 to $1.51, which was 11 cents less than expected.

Turning Smucker’s Earnings Woes Around

However, things are beginning to look up for SJM. While management lowered their earnings outlook for fiscal 2018, it was only by 10 cents from the prior range of $7.75-$7.95 a share. I believe the low end of this range is more realistic, but the stock is now very cheap, trading at just 12.9X these estimates.

In addition, CEO Mark Smucker purchased $1 million in shares, which indicates his confidence in the company and that performance is bottoming.

During the latest conference call, management also noted that Folger volumes were improving toward the end of the quarter and into August. With Dunkin’ Donuts and Café Bustelo still holding up, coffee results should strengthen.

Pet food remains a good growth category, and SJM’s premium brands Nature’s Recipe and Nature’s Balance are doing well. While price cuts may weigh on the segment for the next few quarters, they will eventually roll off the year-over-year comparisons. Cost cuts throughout the organization should also drive improvement.

Another encouraging sign is progress in cash generated from operations in the quarter ($304 million versus $239 million a year ago), which shows earnings quality is improving and stabilizing results. The 3% dividend yield is also attractive and should continue to entice value investors.

The one wild card here was highlighted in General Mills, Inc.’s (NYSE:GIS) disappointing earnings results last month, which saw organic sales fall 3%.

There is no question that the packaged food industry is facing some hurdles right now as consumers eat out more and private-label brands gain share; however, I believe the risk is now completely priced into SJM. The stock is a bargain on a relative and absolute basis, while GIS is much more expensive at 16.2X forward EPS estimates even though it’s facing the same issues.

And on top of all that, SJM pays a full tax rate, so earnings would get an immediate boost from any tax reform efforts. Add it up and you have a value opportunity that’s jam-packed with potential.

Hilary Kramer is the editor of GameChangersBreakout StocksHigh Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.


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