Risk-Reward With JM Smucker
- By Jonathan Poland
JM Smucker Co. (SJM)'s stock was pushed down to a one-year low yesterday.
The 7% price drop was due to the company missing estimates, with earnings per share of $1.66 and revenue of $2.02 billion. The stock is now off 33% since its all-time high in July 2016. But, these misses come with a major caveat -- the company is still growing. Earnings per share were up 7% and revenue was up 5.2% year over year.
Warning! GuruFocus has detected 2 Warning Sign with SJM. Click here to check it out.
The intrinsic value of SJM
In 2019, JM Smucker expects revenue of $7.9 billion and earnings per share to fall between $8 and $8.20. More importantly, the company is being undervalued by the market, trading at just 12x earnings, 10x cash flow, 1.5x book and 1.5x sales. Each of these are quite a bit lower than Smucker & Co.'s historical averages.
120-year history and amazing brands
The company's brand lineup includes Smucker, Jif, Folgers, Milkbone, Dunkin Donuts (coffee distribution) and Crisco. Are people going to stop eating peanut butter and jelly, drinking coffee, feeding their pets or baking tasty treats with Crisco products? No way. And, if the stock breaks down below $100 a share, that will be the first time since 2014. Whatever happens with the price over the short term, JM Smucker is only becoming more valuable.
It generates the majority of sales from coffee, food and pet food, which saw 32% year-over-year sales growth thanks to the company's continued reputation rebuilding at Big Heart Pet Brands that it bought in 2014. The pet food segment raked in $124 million in profit on $728 million in sales over the last quarter (the second of fiscal 2019). Coffee was second, producing $545 million in sales, but higher profits of $174 million during the quarter.
Recession Risk
If the market is headed toward recession, the majority of Smucker's price declines have already been priced in. During the housing bubble bust of 2008 and 2009, the price of JM Smucker dropped from $55 a share in mid-August to $36.50 a share by mid-March. That has already happened at Smucker since 2016, yet the company continues to pound out cash with over $1.2 billion in operating cash flow and just $321 million in capital spending.
Another sweet tooth company, Nestle, trades at a value that is 21 times larger than Smucker, but produces only 11x more revenue and profit. And, over the last decade, Nestle suffered financial declines as market share eroded, while Smucker still dominates its niche and has seen its results and book value continue to climb.
Price potential
Any price re-adjustment back to the company's five-year averages based on its current financial outlook would push the stock back into the $150 to $190 per share range. Long-term investors should also see dividends rise as well with the current yield a respectable 3.25%. If the company doubles earnings per share in the next decade, a likely event, the dividend could easily match it, further adding to the value of JM Smucker & Co.
Disclosure: I am not long or short JM Smucker.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Sign with SJM. Click here to check it out.
The intrinsic value of SJM
