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What You Should Know Ahead of Smucker's (SJM) Q3 Earnings

Zacks Equity Research

The J. M. Smucker Company SJM is slated to release third-quarter fiscal 2018 results on Feb 16. The question lingering in investors’ minds is whether this consumer food and beverage marketer and manufacturer will be able to deliver a positive earnings surprise in the quarter to be reported. Notably, Smucker has outperformed the Zacks Consensus Estimate by an average of 1.2% in the trailing four quarters. Let’s see what’s in store this time.

J.M. Smucker Company (The) Price and EPS Surprise
 

J.M. Smucker Company (The) Price and EPS Surprise | J.M. Smucker Company (The) Quote

 

Hurdles in Smucker’s Path

Smucker has been witnessing year-over-year decline in bottom line for three straight quarters now, with results being impacted by higher freight costs. For the remainder of fiscal 2018, management expects a rise in freight costs, stemming from industry-wide headwinds. In fact, higher freight costs are anticipated to continue to play a spoilsport in the next fiscal as well. Also, volatile input prices has been a concern for the coffee segment.

Coffee prices are highly volatile and are affected by weather, pest infestation, political decisions in coffee-producing countries, worldwide supply and demand, the relative strength of the dollar and speculative trading. Green coffee prices have been rising steadily for some time now, affecting the coffee segments profitability. During second-quarter 2018, profits from the U.S. Retail Coffee segment declined 18.2% due to higher costs of green coffee and unfavorable volume/mix impacts. The same also negatively impacted gross margin for said period. For the quarter under review, the consensus mark for sales and profit for the U.S. Retail Coffee stands at $541 million and $176 million, up from $538 million and $172 million reported in the same period last year, respectively.

Apart from this, Smucker remains susceptible to fluctuation in the prices of input commodities such as oil, corn, wheat and soybean amongst others.

Focus on Cost Savings & Strategic Partnerships to Fuel Results

While these factors pose concerns for Smucker’s upcoming results, we remain encouraged by the company’s cost-saving efforts from its pet food synergy program. Notably, the company generated savings of roughly $200 million from this program in the last quarter, helping it witness higher profit at its U.S. Retail Pet Foods segment. For the third quarter, the consensus estimate for sales and profit for this segment is pegged at $557 million and $125 million, compared with $551 million and $126 million, respectively.

Apart from this, the company plans to achieve $100 million of its $250 million cost-management program by the end of fiscal 2018. Moreover, we remain hopeful about solid prospects from the company’s impressive brands portfolio. Evidently, favorable net pricing for peanut butter and Smucker’s brand largely drove the top line in the second quarter. Other than this, strong performance of several key brands fueled sales in all segments except U.S. Retail Consumer Foods. For the quarter to be reported, the Zacks Consensus Estimate for sales at this segment is pegged at $510 million, depicting a 1.4% dip from the year-ago figure. However, the consensus mark for profit at this segment is $123 million, representing a 3.4% upside from the year-ago profit.

Final Thoughts & Q3 Expectations

Though higher freight costs, industry headwinds and commodity cost inflation pose threats, Smucker’s focus on cost savings and efficient pricing across core segments should drive its performance in the third quarter. Also, Smucker’s concentration on innovations and alliances with companies such as Dunkin' Brands Group among many others should also yield results.

The current Zacks Consensus Estimate for the quarter under review is pegged at $2.16, which shows an upside of 8% from $2.00 recorded in the year-ago period. This estimate has trended upward by a notch in last 30 days. Moreover, analysts polled by Zacks expect revenues of $1,888 million, up marginally by 0.5% from the year-ago quarter.

What the Zacks Model Unveils

To top it, our proven model shows that Smuckeris likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Encouragingly, Smucker carries a Zacks Rank #3, and possesses an Earnings ESP of +0.84%, which makes us reasonably confident of yet another positive surprise.

Other Stocks With Favorable Combination

Here are other some companies that possess the right combination of elements to post an earnings beat:

Ollie's Bargain OLLI has an Earnings ESP of +5.32% and carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Molson Coors TAP has an Earnings ESP of +6.51% and carries a Zacks Rank #3.

Conagra Brands CAG has an Earnings ESP of +3.61% and a Zacks Rank #3.

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