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Smucker (SJM) Up 3.5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Smucker (SJM). Shares have added about 3.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Smucker due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Smucker Q1 Earnings Miss Estimates, Lowers View

J. M. Smucker posted results for the first quarter of fiscal 2020. Adjusted earnings of $1.58 per share declined nearly 11% year over year and missed the Zacks Consensus Estimate of $1.75.

Net sales of the company amounted to $1,778.9 million, which missed the consensus mark of $1,885 million. Moreover, the top line declined roughly 6% year over year mainly due to the divestiture of the U.S. baking business, partly compensated by the Ainsworth buyout. Notably, the Ainsworth acquisition contributed $25.4 million during the quarter.

Excluding items that affected comparability, the top line declined 4% due to reduced volume/mix and lower net price realization, which dragged sales by 3 and 1 percentage points, respectively.

Adjusted gross profit fell 4.2% to $670.6 million while the adjusted gross margin expanded 90 basis points to 37.7%. Adjusted operating income declined 8.3% to $290.7 million and adjusted operating margin contracted 40 basis points to 16.3%.

Segment Performance

U.S. Retail Pet Foods: The company's U.S. Retail Coffee Market segments’ sales were $669.9 million, which dipped marginally from the prior-year quarter’s figure. Excluding Ainsworth’s contribution, net sales declined due to lower sales of private-label products. This, in turn, was the reason behind the company’s exit from low-margin products and weak trends at some retailers. Improved net price realization was offset by lower volume/mix.

U.S. Retail Consumer Foods: Sales in the segment declined 17% to $402.2 million, thanks to the divestiture of the baking business. Excluding the non-comparable results, sales in the segment fell 3% due to reduced net pricing, somewhat compensated by improved volume/mix.

U.S. Retail Coffee Market: Net sales dropped about 5% to $465.7 million due to lower net price realization and unfavorable volume/mix.

International and Away From Home: Net sales fell 7% from the prior-year quarter to $241.1 million, thanks to lower net price realization, adverse volume/mix and impacts of the divestiture of the U.S. baking business.

Financials

Smucker exited the quarter with cash and cash equivalents of $48.8 million, long-term debt (less current portion) of $4,685.3 million, and total shareholders’ equity of $8,007.7 million. Cash flow from operations amounted to $221.5 million in the quarter and free cash flow totaled $148.5 million.

Fiscal 2020 Outlook

Smucker now expects net sales to be down 1% to flat compared with an increase of 1-2% mentioned earlier. The top-line view includes a loss of $105.9 million, stemming from the divestiture of the U.S. baking business and non-comparable sales associated with Ainsworth. On a comparable basis, sales are now projected to be flat to up 1% compared with growth of more than 2% stated previously. 

Adjusted earnings are now anticipated to be $8.35-$8.55 per share, down from $8.45-$8.65 mentioned earlier. Smucker’s adjusted earnings were $8.29 per share in fiscal 2019. The bottom line is likely to be affected by reduced contributions from sales while slightly lower SD&A costs are likely to offer some cushion. Gross margin is anticipated to be roughly 38.5% in fiscal 2020.

Free cash flow is still projected to be $875-$925 million and capital expenditure to be $300-$320 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, Smucker has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Smucker has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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