As a general rule, I don’t like CPGs (consumer packaged goods) like J M Smucker Co (NYSE:SJM). But Smuckers might be the exception to the rule. SJM stock news has been fast and furious so far this year, and it looks like it’s getting out from under the negative trends in its sector.
So far, the moves haven’t done much for SJM. SJM stock still sits about 17% below all-time highs reached back in 2016. And the market doesn’t quite trust the stock, either, with a forward P/E multiple of just 13.5x.
But that seems to make Smuckers stock simply too cheap. GameChangers editor Hilary Kramer made a strong bull case for the stock last month, after calling SJM her Best Stock of 2018. And I think Kramer is on the right path. J M Smucker is making some big moves, and there’s a good chance those moves will pay off for patient investors.
A Lot of SJM News
It’s already been a very busy 2018 for Smuckers. SJM stock closed 2017 on a strong run, boosted by tax-reform benefits and a Q2 earnings beat in November. The broad market decline that began in late January sent SJM stumbling, but another strong report in February offset concerns about a recall of the company’s dog food.
In early March, Smuckers and Conagra Brands Inc (NYSE:CAG) called off their deal, in which SJM would have acquired the Wesson Oil brand from Conagra, citing a challenge from the FTC. With that $285 million purchase ended, SJM aimed higher. It acquired privately held Ainsworth Pet Nutrition, maker of Rachael Ray Nutrish and other brands, for $1.7 billion.
That deal looked like a smaller version of another transaction in the pet-food space. In February, General Mills, Inc. (NYSE:GIS) bought out Blue Buffalo Pet Products Inc (NASDAQ:BUFF) for roughly $8 billion.
The parallels aren’t exactly flattering for Smuckers. General Mills is struggling badly and from my perspective, hardly looks attractive even at a five-year low. The Blue Buffalo purchase looked like an effort by GIS to find growth anywhere, at almost any price. But that’s not the case with SJM whose strategy is more logical and much less desperate.
Getting Away From Food
Right now, the U.S. CPG space simply looks too tough, particularly for those manufacturers with significant exposure to the grocery space. Grocers like Kroger Co (NYSE:KR) are aggressively pushing their own private-label products in a bid to maintain margins.
And as an analyst so well described it a couple of years ago in regards to Procter & Gamble Co (NYSE:PG), “you’re seeing a lot of ‘Davids’ beating ‘Goliaths’ every day.” Smaller brands are winning in a number of key categories (with both Blue Buffalo and Nutrish being notable examples in pet food).
But the good news for Smuckers is that its exposure increasingly is in the stronger areas of the space. Pro forma for the Ainsworth deal, SJM’s revenue breakdown is as follows:
– U.S. Retail Coffee 26%
– U.S. Retail Consumer Foods 25%
– U.S. Retail Pet Foods 36%
– International and Away from Home 13%
Meanwhile, if the company does sell its baking brands, as it’s considering, the percentage of revenue coming from consumer foods would be down to about 20%. Nearly two-thirds of revenue would come from coffee and pet foods — two categories that are growing, not shrinking.
Those categories are hard to find these days. And stocks that have that exposure are very dearly valued. But SJM is not.
What Is SJM Stock Worth?
McCormick & Co (NYSE:MKC), which I own, trades at ~17x EV/EBITDA and 20x forward EPS despite a debt load that’s much larger than that of SJM (even after the Ainsworth deal, which will be funded by debt). PG is at a multiyear low and still trades at 17x+ forward EPS. CAG is at 16x.
Meanwhile, SJM trades at 14x the midpoint of its FY18 guidance, and closer to 13x simply applying the lower expected tax rate for fiscal 2019. And it trades at just 10x EV/EBITDA (again, pro forma for the Ainsworth purchase), which is one of the lowest multiples in the space.
That seems too low, given that J M Smucker is better positioned than many of those peers. And it opens a path to substantial upside for SJM stock. An 18x EPS multiple and a 12x EV/EBITDA multiple — neither of them outliers — suggest a share price around $175. That’s nearly 40% upside, not including the 2.5% dividend.
That said, there are risks. Again, I don’t particularly like the space, and it’s possible that peer multiples will come down, rather than SJM’s rising. But even in that eventuality, SJM is cheap enough to expect double-digit appreciation at least, and mid-double-digit total returns.
That’s something I don’t believe is true of any other stock in the industry, and it’s a fine reason to own SJM stock.
As of this writing, Vince Martin is long shares of McCormick & Co and has no positions in any other securities mentioned.