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Here's Why Investors Should Buy J. M. Smucker for the Long Run

July 17, 2014 | About:
jaggom

jaggom

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J. M. Smucker (SJM) is the manufacturer of food products. It competes with other packaged and processed food companies like ConAgra (CAG) and Mondelez (MDLZ). Let’s analyze how J. M. Smucker competes against its peers like ConAgra and Mondelez in the lucrative and volatile packaged- and processed-foods market.

Quarterly results

The earnings per share for Smucker increased 13% to $1.66 on year-over-year basis. However, the consolidated revenue declined 6% year over year to $1.46 billion. This decline in revenue was attributed to a 6% reduction in net price realization, mainly due to coffee and peanut butter. Smucker was unable to meet the analyst’s expectations for both top and bottom lines.

The weakness in the U.S. retail business is expected to continue in the fourth quarter. Additionally, there’re also headwinds of unfavorable currency movements. Therefore, the company has downgraded its full year EPS expectation from $5.72 to $5.82 earlier to be in the range of $5.55 to $5.60.

The way forward

But, long-term investors should not be worrying about these short-term challenges because Smucker has a long history of 117 years to cope up with such challenges.

For instance, Smucker has achieved the target of introducing 100 new products in the current fiscal, and looking forward, it has a robust pipeline of innovative products for 2015. It has plans to introduce three new K-Cup varieties. It’s also planning to initiate the distribution of K-Cup offerings in new channels that includes e-commerce channels.

Stiff competition

But, this inorganic growth through acquisitions and innovations isn’t just the specialty of Smucker. For instance, the top line growth of ConAgra in its previous quarter appeared along with acquisitions. The acquisition of Ralcorp Holdings by Smucker projected it to the top of the North American private-label food market.

The promotion of private-label brands and store brands by the retailers converts private-label brands into a huge market. In addition, according to a research study by Nielsen & Co. approximately 46% of consumers turn toward private-label brands when there’s an increase in food price. Thereby, the acquisition of Ralcorp by ConAgra opens up a huge opportunity for latter. The company has repeated its view of $300 million in synergies in fiscal 2017. This acquisition is believed to add $0.25 per share to earnings in fiscal 2014, according to the company.

Contrastingly, the fourth quarter for Mondelez was inferior to its third quarter; however there was only 0.1% decline in the revenue on year-over-year basis in comparison to 6% of Smucker. But Mondelez also missed analyst’s expectations on both top and bottom lines primarily due to a slowdown in the emerging markets. According to management, the first year for Mondelez as a global snacks company turned out to be unsatisfactory.

Mondelez suffered feeble biscuit sales in China during the latter half of fiscal 2013, coupled with tough pricing conditions from coffee and weaker global category growth. In addition, Chief Executive Officer Irene Rosenfeld admitted to the fact that the margins for Mondelez were weaker than its peers.

Further, the company is focused on restructuring and reinventing its supply chain which is also believed to be a long-term growth driver.

Conclusion

Smucker performed weakly during the previous quarter, but has some effective strategies in line to place it robustly for the long run. The company has new line products to be added to its portfolio, and the entry into K-cups is believed to help the company capture the growing single-serve market. In addition, J.M. Smucker looks cheap with 18 times trailing P/E and a dividend yield of 2.40% which adds to its attractiveness. Therefore, Smucker investors should forget the short-term weakness in the previous quarter and eye at its solid long-term growth prospects.


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