Smucker Reaffirmed at Neutral

Zacks

We reaffirm our Neutral recommendation on The J.M. Smucker Co (SJM) following an appraisal of its third quarter fiscal 2013 results.

Why the Reiteration?

Smucker posted strong fiscal third quarter results beating the Zacks Consensus Estimate for both revenues and earnings. The company’s continued focus on its brands through innovations and promotional offerings, strategic acquisitions, improving volumes of K-cups and effective utilization of cash through buybacks drove earnings.

The company’s earnings of $1.47 per share jumped approximately 20% year over year in the third quarter, primarily driven by increased sales growth and lower share count due to share buybacks. Net sales growth of 6% was driven by favorable sales mix and benefits from the acquisition of Sara Lee Corporation’s North American foodservice coffee and hot beverage business in January last year. Volume gains in the higher priced K-Cups coffee brand and peanut butter business also fueled growth.

In addition, the company managed to offset higher peanut costs in the quarter by acquisition gains, favorable sales mix and lower green coffee costs. This was also reflected in higher gross and operating margins in the third quarter.

Smucker also raised the lower end of its adjusted earnings guidance to a range of $5.17 to $5.22 per share from 5.12 to $5.22 per share announced previously. The company had already increased its fiscal 2013 earnings guidance in the first and second quarters, reflecting its attractive earnings potential.

Following its third quarter earnings, Smucker slashed the list prices by an average 6% for its flagship brand Folgers, its licensed brand Dunkin' Donuts and majority of its packaged coffee products sold in the U.S. The company has cut its prices for the third time since year 2011 in response to decline in green coffee costs.

However, the company has been experiencing volume declines in major categories since last many quarters. Volumes declined 1% in the third quarter due to declines in the Pillsbury, Canadian Robin Hood and Five Roses flour brands, offset by gains in Jif peanut butter and Smucker’s fruit spreads. In addition, tough foreign exchange environment, Euro-zone crisis and slow recovery of the U.S. economy act as headwinds.

Smucker holds a Zacks Rank #3 (Hold). Other stocks in the food industry that are portraying strong upward trend are Flower Foods Inc (FLO), Kraft Foods Group Inc (KRFT) and Kellogg Co (K). While Flower Foods carries a Zacks Rank #1 (Strong Buy), Kraft and Kellogg hold a Zacks Rank #2 (Buy).

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