J. M. Smucker Co. (SJM, Financial), the $13.4 billion Ohio-based packaged foods maker, reported a 5.4% revenue decline to $7.39 billion and a not-so-good 14% profit decline to $592 million in fiscal year 2017 resulting in an 8% margin compared to 8.8% in fiscal year 2016.
Smucker could still have derived a somewhat similar level of profitability from its previous year if not for its $133 million impairment charge.
According to filings, the company recognized impairment charges of the $128.5 million of the $133 million in relation to certain indefinite-lived trademarks, primarily within the U.S. Retail Pet Foods segment. Further, these indefinite-lived trademarks remain susceptible to future impairment charges.
In addition, Smucker sees its adjusted earnings per share (EPS) to be in the range of $7.85 and $8.05 in fiscal year 2018. This would indicate a 2.98% year-over-year growth at midpoint comparison from fiscal year 2017. The company also anticipates a comparable net sales increase of one percentage point in the coming year.
"In fiscal 2017, we grew adjusted EPS by 7% over the prior year.
"In the new fiscal year, we continue to execute our strategic plan for sustainable, long-term growth by capitalizing on changes in consumer preferences and the retail environment. We will fuel the momentum of our growth brands like Smucker's® Uncrustables®, Nature's Recipe® and Café Bustelo® while supporting our base businesses in coffee, peanut butter, pet food and pet snacks. Accelerated cost savings and expanded capabilities are key components of our multidimensional strategy to deliver top- and bottom-line growth and increase shareholder value." –Â Mark Smucker, CEO
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Valuations
Smucker, despite being at its one-year low share price, still traded at premium compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 23.17 times vs. the industry median of 20.17 times, a price-book (P/B) ratio of 1.95 times vs. the industry median of 1.73 times and a price-sales (P/S) ratio of 1.83 times vs. the industry median of 1.06 times.
The company also had trailing dividend yield of 2.54% with a 57% payout ratio.
Average fiscal 2018 revenue and EPS estimates indicated forward multiples of 1.8 times and 14.8 times.
Total returns
Smucker has failed to outperform the broader Standard & Poor's 500 index in the past five years having generated (annualized) returns of 11.46% compared to the index’s 14.48% (Morningstar). So far this year, the company provided 6.57% total losses vs. the index’s 9.6% positive gains.
J. M. Smucker Co.
According to filings, Smucker was established in 1897 and incorporated in Ohio in 1921.
It operates principally in one industry, the manufacturing and marketing of branded food and beverage products on a worldwide basis.
In the recent fiscal year, 92.9% of the company’s net sales were in the U.S. while 5.6% were in Canada.
On March 23, 2015, the company completed the acquisition of Big Heart Pet Brands, a leading producer, distributor and marketer of premium-quality, branded pet food and pet snacks in the U.S.
The cash and stock transaction was valued at $5.9 billion, which included the issuance of 17.9 million shares of the company’s common stock to the shareholders of Blue Acquisition Group Inc., Big Heart’s parent company. Smucker also assumed a new debt of $5.5 billion as part of the transaction.
Smucker’s principal products are coffee, pet food, pet snacks, peanut butter, fruit spreads, shortening and oils, baking mixes and ready-to-spread frostings, frozen sandwiches, flour and baking ingredients, juices and beverages and portion control products.
In the recent fiscal year, 34% or $2.5 billion of Smucker’s net sales were in its coffee products while pet food generated about 19%. Pet snacks and peanut butter, meanwhile, generated 10% of net sales each. The rest also contributed to the company’s net sales but at figures less than 10%.
The company has three reportable segments: U.S. Retail Coffee, U.S. Retail Consumer Foods and U.S. Retail Pet Foods.
U.S. Retail Coffee
The U.S. Retail Coffee segment primarily includes the domestic sales of Folgers®, Dunkin’ Donuts® and Café Bustelo® branded coffee.
In fiscal year 2017, revenue in the segment fell by 6% to $2.1 billion (29% of total revenue) and reported a segment margin of 32.4% (most profitable among the segments) compared to 32.3% in 2016.
According to filings, the decline in revenue was primarily due to lower net price realization, which was mainly attributed to the net impact of pricing actions taken since the beginning of 2016 and unfavorable volume/mix.
U.S. Retail Consumer Foods
The U.S. Retail Consumer Foods segment primarily includes domestic sales of Jif ®, Smucker’s®, Crisco® and Pillsbury® branded products.
In the recent fiscal year, sales in the retail consumer segment fell by 8% to $2.09 billion (28% of total sales) and generated a segment margin of 22% compared to 20.6% in 2016.
According to filings, the majority of the sales decline was primarily reflecting noncomparable net sales of $138.9 million in the prior year related to the company’s divested U.S. canned milk business. Excluding the impact of the divestiture, net sales decreased 2%, which was entirely driven by unfavorable volume/mix.
U.S. Retail Pet Foods
The U.S. Retail Pet Foods segment primarily includes domestic sales of Meow Mix®, Milk-Bone, Natural Balance®, Kibbles ’n Bits®, 9Lives®, Pup-Peroni and Nature’s Recipe® branded products.
In the recent year, revenue in the pet foods segment also fell by 5% to $2.14 billion (29% of total sales) and delivered a margin of 22.5% vs. 21.9% in 2016. The decline in net sales was primarily due to unfavorable volume/mix.
International and Foodservice
According to filings, International and Foodservice is comprised of products distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., restaurants, lodging, schools and universities, health care operators).
In fiscal year 2017, revenue in international and foodservice rose by a percentage point to $1.06 billion (14% of total sales) and generated a margin of 17.4% compared to 17% in 2016.
Sales and profits
In the past three years, Smucker averaged a revenue increase of 9.63%, profit increase of 1.57% and profit margin of 7.59% (Morningstar).
Cash, debt and book value
As of April, Smucker had $166.8 million in cash and cash equivalents and $5.4 billion in debt with debt-equity ratio of 0.79 times vs. 0.77 times in April 2016. The company has its equity fall by $158.3 million while overall debt has fallen by $31.5 million in the same time period.
Of Smucker’s $15.6 billion assets 78%Â were identified as blue sky elements or goodwill and intangible assets. The company’s book value has declined by 2.3% year over year to $6.85 billion.
Cash flow
In fiscal year 2017, Smucker’s cash flow from operations declined by 27.5% to $1.06 billion. In addition to lower profits from the prior-year operations, the company also had (more of) cash outflows in the following items: defined benefit pension contributions and accrued liabilities.
Capital expenditures were $192 million leaving the company with $866.6 million in free cash flow compared to $1.26 billion in the year prior; 89.6% of this free cash flow were handed out as dividends and also spent for share repurchases.
During 2017, Smucker repurchased 3.0 million common shares under its 10b5-1 trading plan for $418.1 million, suggesting an average repurchase price of $139.37 per share – 17.96% higher than the share price of $118.15 (at the time of writing). The company also spent $437.8 million in fiscal year 2016 repurchasing 3.4 million of its shares at an estimated average price of $128.77 per share.
The company still has about 3.6 million shares left in its authorization for repurchases, according to company filings.
In the past three fiscal years, Smucker averaged a free cash flow payout ratio of 68.8%. The company also allocated $30 million in debt repayments, net any proceeds.
Conclusion
Smucker does seem to experience ongoing difficulties in growing its business. Even its recently performing pet food business (29% of sales) showed falling revenue growth in recent year of operations. Nonetheless, the company seems to have a diverse set of operations.
The company’s acquisition of the pet food business, having itself left with a good amount of debt, proved to be timely as it (pet food) surpassed Smucker’s consumer food business in terms of revenue generation. The pet food business also appears to be more profitable than the latter.
Smucker also recently recorded an impairment charge that may or may not end soon and along with its balance sheet plenty of blue sky elements (78%). The company, meanwhile, has kept a healthy payout ratio in recent years albeit having spent a good amount of it buying its shares back at a higher price compared to where it is now (52-week low).
Fourteen analysts have an average price target of $136.57 per share –Â 15.6% higher than the share price of $118.15 (at the time of writing). Applying a revenue growth of five percentage points and three-year P/S multiple average followed by a 30% margin application indicated a value of $94.19 per share.
Smucker is a speculative buy with $133.75 per share target price.
Disclosure: I do not have shares in Smucker.
