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Should You Retain J.M. Smucker (SJM) After Q3 Earnings Miss?

Zacks Equity Research

The J.M. Smucker Company SJM, a leading manufacturer of food products, has been in troubled waters of late, due to weak third-quarter fiscal 2017 results, owing to lower net price realization and unfavorable volume/mix.

Dismal Third-Quarter Results

Smucker posted dismal third-quarter fiscal 2017 results on Feb 17. The bottom line met estimates, after posting positive surprises in the past six straight quarters. However, sales marked its third consecutive miss. Further, the company announced weak view for fiscal 2017.

Adjusted earnings of $2.00 per share declined 2.4% year over year. Excluding the gain on milk business divestiture on Dec 31, 2015, adjusted earnings per share increased 5%. The year-over-year improvement was driven by additional synergy realization, reduced tax rate and lower share count.

Net sales in the quarter declined 5% year over year, due to lower net price realization mostly in the U.S. Retail Pet Foods segment and unfavorable volume/mix in the U.S. Retail Coffee segment. However, it declined 3% excluding the milk business (which impacted last year’s quarter) and currency headwinds (which impacted this quarter).

The recent increase in coffee prices has raised the pricing of its branded roast and ground coffee offerings, which has lowered the sales volume. Higher pricing of Smucker products can also result in customers switching to cheaper brands and delaying purchases. This is significantly hurting the company’s coffee segment.

Estimates Declining

Estimates of this Zacks Rank #3 (Hold) company have been declining over the past 30 days, which is making us pessimistic about the company. The Zacks Consensus Estimate for fiscal 2017 and fiscal 2018 has decreased 0.5% and 1.5% to $7.65 per share and $8.00 per share, respectively.

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


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

Weak Forecast for Fiscal 2017

Management expects top-line softness in the business and across the industry to impact the company’s growth negatively, despite the accelerated realization of synergies and efforts to reduce costs.

Smucker now envisions fiscal 2017 earnings in the range of $7.60−$7.70 per share, in comparison from $7.60−$7.75 per share expected previously. Further, management expects net sales to decrease 5%, wider than the 2−3% decline from fiscal 2016 expected previously, reflecting the impact of U.S. canned milk divestiture.

Excluding the impact of the divestiture, net sales are expected to decline 3% in fiscal 2017, down from the range from flat to down 1% expected previously. The change from previous guidance reflects reduced U.S. Retail Coffee segment net sales results in the third quarter and forecasted sales in the fourth quarter. 

The company also anticipates full-year Coffee segment profit to be down mid-single digits compared to the previous guidance of being flat to the prior year, as Folgers coffee volume are expected to remain soft in the fourth quarter.

Though fiscal year marketing spending is expected to be lower than the previous projection, the company continues to anticipate an increase in the fourth quarter compared with the prior year.

Also, currency headwinds and sluggish pet food business also hurt sales. Heightened competitive activity from more-premium brands and challenges in dry dog food against a deflationary macro environment is impacting the performance of the Kibbles 'n Bits brand. Also, retailers are increasingly looking at pet snacks as a new category separate from regular food, and are focusing more on to it. The company continues to expect softness in Pet Food sales in the near term.

Though heightened competition in the pet food business in the near term remains a concern, strong organic sales growth, product innovation and constant efforts to expand through acquisitions are the company’s strong points.

Further, the company has delivered positive earnings surprises in three of the four trailing quarters, with in-line earnings in the remaining one, making for an average positive surprise of 17.1%. A low beta of 0.60, a dividend yield of 2.13%, VGM score of ‘B’ and a long-term earnings growth rate of 6.2% also makes the stock attractive.

These positives are clearly seen in the share price movement of the company. We observed that the stock gained 11.9% over the past three months, outperforming the Zacks categorized Food-Miscellaneous/Diversified industry which witnessed an improvement of 5.7% over the same time frame. This signals that the stock has potential to do well over the long term.

Other Key Picks

Some better-ranked food stocks in the industry include Lamb Weston Holdings Inc. LW, Ingredion, Inc. INGR and ConAgra Foods, Inc. CAG.

Lamb Weston has long-term earnings growth rate of 3.24% and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ConAgra Foods and Ingredion, both carrying a Zacks Rank #2 (Buy), have growth rates of 8.00% and 11.00%, respectively.

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