Given the recent broader market selloff and that the beginning of the second quarter now is a great time to check on my Best Stocks for 2018 pick: J M Smucker Co (NYSE:SJM).
I like that the stock has held up well considering the volatile environment and continued pressure on consumer product names.
In a world where consumers are earning more, showing greater interest in healthier eating and buying emerging brands while leaving old favorites behind, it has been a tough go for many established companies. Procter & Gamble Co (NYSE:PG), for example, is down over 10% for the year and trading where it did in 2013. General Mills, Inc. (NYSE:GIS) has lost over 20% and is trading back to where it did in 2012.
SJM is flat through the first quarter, and I am confident it can overcome the industry challenges and move higher.
SJM Has Valuation on Its Side
The stock is very attractively valued, trading at 15X EPS estimates of $8.25 for 2018. Helped by tax cuts, EPS for 2019 should improve to at least $9. And the stock sells for 13X that year’s estimates. A large reason for the sector’s multi-year underperformance was that investors were willing to pay a premium multiple due to their perceived stability. At current prices, this is not a problem for SJM.
More importantly, the company can achieve its estimates. Before pulling back on broader market weakness and sector concerns, the stock traded over $130 thanks to its solid fiscal third-quarter earnings. EPS was up 25% to $2.40 and 7.5% excluding the lower corporate tax rate. Sales were up 1%, driven by 2% gains in the critical coffee and pet care segments.
Popularity Brings Strong Sales for SJM
Smucker’s coffee segment is benefitting from the sale of Dunkin’ Donuts pods and the growing popularity of SJM’s Café Bustelo brand. In addition, management introduced a high-end Folger’s product, 1850, as they try to maintain market share with Folger’s products.
In the pet segment, the company saw strong sales from its popular snacks like Pup-Peroni and Milk Bone. Investments in pricing also led to higher volumes for Nature’s Recipe. While this hurt the segment’s operating profit, it will ultimately help SJM in the long run to gain a strong presence in high-end dog food.
While U.S. retail foods was disappointing in the quarter with sales off 1%, this segment still increased operating profits 2%. Management hopes to improve volumes going forward by investing in their Pillsbury brand of baking products.
I think the company is handling the stresses that come with being in this industry very well and has a strengthening position in the growing food and coffee categories. The stock’s valuation, as well as its 2.5% dividend yield, should add a good layer of support.
Plus, if economic growth slows, the consumer products group should quickly return to favor, with SJM as the leader of the pack.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High 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.