/ Equity Research / SJM | Page 1
The J.M. Smucker Company/ (SJM-NYSE)
/ Equity Research / SJM | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Outperform
Date of Last Change / 04/13/2010
Current Price (02/16/15) / $113.89
Target Price / $120.00
J.M. Smuckerposted better-than-expected earnings in the third-quarter of fiscal 2015 while revenues missed the Zacks Consensus Estimate. Earnings however declined5.5% from the prior-year quarter as a decline in sales and margins more than offset the positive impact of share repurchases in the quarter. Revenues declined 2% due to unfavorable sales mix and decreased volume, most significantly in the U.S. Retail Coffee segment.In fact, the company continues to expect softer volumes in the Retail Coffee segment in the fourth quarter and fiscal 2015. However, the Sahale acquisition is expected to pull up the top line to some extent. We are also encouraged with the company’s announcement to acquire pet food maker Big Heart Pet Brands which is likely to be a revenue driver for the company in the coming quarters.
SUMMARY/ Equity Research / SJM | Page 1
SUMMARY DATA52-Week High / $113.89
52-Week Low / $91.81
One-Year Return (%) / 26.30
Beta / 0.55
Average Daily Volume (sh) / 959,690
Shares Outstanding (mil) / 102
Market Capitalization ($mil) / $11,590
Short Interest Ratio (days) / 10.47
Institutional Ownership (%) / 68
Insider Ownership (%) / 4
Annual Cash Dividend / $2.56
Dividend Yield (%) / 2.25
5-Yr. Historical Growth Rates
Sales (%) / 5.0
Earnings Per Share (%) / 6.0
Dividend (%) / 12.1
P/E using TTM EPS / 20.3
P/E using 2015 Estimate / 21.2
P/E using 2016 Estimate / 19.3
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Low,
Type of Stock / Large-Blend
Industry / Food-Misc/Dvrsd
Zacks Industry Rank * / 205 out of 267
J.M. Smucker Third Quarter’s Earnings Beat, Sales Miss as Volumes Fall – Feb 13, 2015
Smucker posted better-than-expected earnings in the third-quarter of fiscal 2015 while revenues missed the Zacks Consensus Estimate.
Adjusted earnings of $1.54 per share exceeded the Zacks Consensus Estimate of $1.50 per share by 2.67% in the third quarter of fiscal 2015. However, earnings declined 5.5% from the prior-year quarter as a decline in sales and margins more than offset the positive impact of share repurchases in the quarter.
Revenue and Margin Details
Net sales in the third quarter declined 2% year over year to $1.44 billion and lagged the Zacks Consensus Estimate of $1.46 billion. The decline was due to unfavorable sales mix and decreased volume, most significantly in the U.S. Retail Coffee segment. The exit of the private label foodservice hot beverage business also impacted volumes. Besides the Folgers coffee brand, volumes also declined in private label canned milk and natural beverages. However, Jif peanut butter, Crisco oils, Smucker's fruit spreads and Uncrustables frozen sandwiches witnessed volume gains during the third quarter.
Net price realization was up 1% as an increase in coffee pricing was offset by lower net pricing for oils and peanut butter. The recent acquisition of Sahale Snacks (Sep 2014) added $12.8 million to third quarter sales, while foreign exchange reduced net sales by $9.6 million in the quarter. Excluding acquisition, distribution agreement and currency impact, sales declined 2% to $1.437 billion in the quarter.
Adjusted gross profit declined 6% to $509.9 million. Adjusted gross margin declined 170 basis points (bps) to 35.4% due to higher commodity costs, lower volume, unfavorable mix and currency headwinds. Overall, commodity costs were higher attributed to green coffee costs, which more than offset lower peanut and oil costs.
Adjusted operating profit declined 8% to $248 million due to a decline in gross profit and higher general and administrative expenses, offset by lower marketing expenses.
U.S. Retail Coffee Market: The company's biggest segment, U.S. Retail Coffee Market, reported 1% decline in sales to $571.8 million mainly due to lower volume, partially offset by favorable mix and higher net price realization. The higher price realization resulted from an increase in packaged coffee prices of Folgers and Dunkin' Donuts branded products by an average 9% in Jun 2014 and from an increase in K-cup prices in the U.S. by an average 8% in Jan 2015 in response to the continuous hike in green coffee costs. While the hike in coffee costs resulted in higher price realization during the quarter, it led to a significant decline in coffee volumes.
Segment volume declined 8% in the third quarter of fiscal 2015, mainly due to a decrease in Folgers coffee brand as customers recoiled strongly due to rising prices. Volumes of Dunkin' Donuts packaged coffee were flat in the quarter, while volumes of the Cafe Bustelo brand increased 5%.
Net sales of Keurig portion packs decreased 8% due to a 3% decline in volumes, primarily due to the Millstone K-Cup packs. Segment operating margin contracted 500 bps to 26.3% in the quarter due to lower sales volume and the impact of higher costs, which were not fully offset by higher net prices.
U.S. Retail Consumer Foods: U.S. Retail Consumer Foods segment sales declined 2% to $549.5 million due to lower net price realization, primarily in the Crisco and Jif brands, which offset the 1% increase in volumes. The Sahale business contributed $10.3 million to segment net sales in the third quarter of fiscal 2015.
Segment profit margin expanded 200 bps to 20.8% in the quarter, primarily driven by a decrease in marketing expense, favorable sales mix, and higher volume. Overall lower commodity costs, primarily for peanuts and oils were more than offset by lower net price realization. The acquisition of Sahale modestly added to segment profit in the third quarter of fiscal 2015.
International, Foodservice and Natural Foods: Net sales in the International, Foodservice and Natural Foods segment declined 3% from the previous year quarter to $318.7 million. Excluding the impact of the acquired Sahale business and foreign exchange, segment net sales decreased 1% from the prior-year period due to a 3% decline in volumes and unfavorable sales mix, which offset higher net price realization. The segment's profit margin expanded 210 bps to 15.1% in the reported quarter.
The company has not provided any specific guidance for fiscal 2015 as it expects to complete its acquisition of Big Heart Pet Brands in the fourth quarter of fiscal 2015, as was announced in early-February. However, the company expects a modest decline in net sales compared to the prior-year period, excluding the impact of Big Heart Pet Brands, due to softer volumes in its U.S. Retail Coffee segment than previously anticipated.
Based on fourth quarter estimates, Smucker expects a decline of nearly 3% in fiscal 2015 sales compared with the prior year and also higher than a decline of 1% anticipated previously. This is due to an expected decline in coffee volume, primarily in the U.S. Retail Coffee segment.
Excluding the impact of Big Heart Pet Brands acquisition, the company expects fiscal 2015 earnings per share to be around 3% below the midpoint of its previous guidance range of $5.45 to $5.65. Given the anticipated lower coffee volumes, the company now expects full year U.S. Retail Coffee segment profit to decline approximately 15%, as compared to the prior year.
Smucker’s current trailing 12-month earnings multiple is 20.3x, representing a discount of 12.5% to the industry average of 23.2x. Over the last five years, Smucker’s shares have traded in the range of 12.5x to 20.6x trailing 12-month earnings. Based on fiscal 2015 earnings estimate of $5.38, the stock is trading at 21.2x, a 26.9% discount to the industry average of 29.0x.
At the end of the third quarter of fiscal 2015, the P/B multiple of the stock was approximately 2.0x, 47.4% discount to the industry average of 3.8x.
Our target price of $120.00is based on approximately 22.3x our fiscal 2015 earnings estimate. On a P/B basis, the price target is based on a P/B multiple of approximately 2.34x. Smucker holds a Zacks Rank #3 (Hold).
Earnings Surprise and Estimate Revision History
NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET.
Headquartered in Orrville, Ohio the J.M. Smucker Company engages in the manufacture and marketing of branded food products in the United States, Europe and Canada. The company’s primary products include coffee, peanut butter, fruit spreads, shortening and oils, baking mixes and ready-to-spread frostings, and canned milk. Additionally, the company also produces flour and baking ingredients, juices and beverages, frozen sandwiches, toppings, syrups, pickles and condiments. The company has established a strong brand portfolio with leading brands like Smucker's, Folgers, Dunkin' Donuts, Jif, Crisco, Pillsbury, Eagle Brand, R.W. Knudsen Family, Hungry Jack, Café Bustelo, Café Pilon, White Lily and Martha White in the United States as well as Robin Hood, Five Roses, Carnation and Bick's in Canada.
The company has three reportable segments: U.S. Retail Coffee Market, U.S. Retail Consumer Foods, and International, Foodservice, and Natural Foods.
The U.S. Retail Coffee segment primarily represents the domestic sales of Folgers, Dunkin' Donuts, Millstone, Café Bustelo, and Café Pilon branded coffee to retail customers;
The U.S. Retail Consumer Foods segment primarily includes domestic sales of Smucker's, Crisco, Jif, Pillsbury, Eagle Brand, Hungry Jack, and Martha White branded consumer products.
The International, Foodservice, and Natural Foods segment represents sales outside of the U.S. retail markets, and includes operations of the majority of the North American foodservice coffee and hot beverage business from Sara Lee Corporation in Jan 2012.
REASONS TO BUY
Strong Brand Portfolio: Smucker offers moderately priced, exclusive quality products and has a strong brand portfolio with popular brands like Smucker's, Folgers, Dunkin' Donuts, Jif, Crisco, Pillsbury, Eagle Brand, Robin Hood, Five Roses, Carnation and Bick's.
The company also remains focused on brand building through product innovation. The launch of over 100 new products in fiscal 2014, including Jif Whips and new varieties of Pillsbury baking products, helped in boosting revenues. Some of the planned product launches of fiscal 2015 include Smucker’s Fruit-fulls and Café Bustelo K-Cup packs, which are driving profits.
Strategic Partnerships with Companies: The company has formed key partnerships with many coffee companies. The company expanded its multi-year agreement in May 2014 with Keurig Green Mountain Coffee Roasters, the makers of K-Cups, for the manufacturing, marketing, distribution, and sale of Smucker’s coffee brands in K-cup portion packs, which can be used on new Keurig brewing systems. The partnership has helped the companies to reach out to more customers across different segments who prefer their coffee in K-cups. Smucker also has a partnership with Dunkin Brands Group, Inc. to produce Dunkin' Donuts packaged coffee.
These higher-priced K-cups and Dunkin’ Donuts products have been boosting the company’s revenues since the past many quarters.
Strategic Acquisitions: Smucker actively pursues strategic acquisitions both in the U.S. as well as overseas. The recent acquisition announcement of pet food maker Big Heart Pet Brand will put the company in the fasted growing pet food and snacks category in U.S. In early Sep 2014, Smucker completed the acquisition of Seattle, WA-based Sahale Snacks, Inc., which manufactures and markets premium, branded nut and fruit snacks and will contribute approximately $25 million to fiscal 2015 sales.
With the acquisition of Enray Inc., a manufacturer and marketer of premium organic, gluten-free ancient grain products - in Aug 2013, the company took control of Enray’s flagship brand truRoots, which has helped the company to grow across the rapidly growing gluten free market. The acquisition is expected to add sales in excess of $50 million on an annual basis, thus increasing the scale of the company’s natural foods and specialty businesses.
Some of Smucker’s past acquisitions include Seamild in China, Hillshire Brands Company’s North American foodservice coffee and hot beverage business in 2012 and the coffee brands and business operations of Rowland Coffee in 2011. These acquisitions have added iconic brands to the company’s portfolio and strengthened its presence in the United States.
Restructuring Initiatives:Under the restructuring initiative (taken during 2010), Smucker had planned to streamline its coffee and fruit spreads manufacturing network to enhance the long-term strength and profitability of its leading brands.
Since then, the company has expanded the restructuring plan and transitioned the Canadian pickle and condiments operations to third-party manufacturers in 2012 and expanded capacity of the peanut butter business in fiscal 2013. Moreover, the company completed the consolidation of coffee production in New Orleans. The restructuring resulted in reduction of all of the anticipated 850 full-time positions.The company expects to realize total savings by the end of 2017.
Returning Value to its Shareholders: The company has been rewarding its shareholders through regular dividend payments and share buybacks. The company has increased its dividend rate consistently which includes the latest hikes of 10% in 2014 and 11.5% in 2013. Apart from dividends, the company also actively repurchases shares. During fiscal 2014, the company repurchased shares worth $495 million. Regular share repurchase programs further spur profitability, attracting investor loyalty.
REASONS TO SELL
Declining Volumes Owing to Rise in Coffee Prices: The profitability of Smucker largely depends on the prices of green coffee, where a hike in coffee prices can slightly erode sales volume.
Since January 2014, Smucker has been witnessing a rise in green coffee costs, largely due to increasing prices of Arabica coffee as a result of an ongoing drought in Brazil. As a result, in Jun 2014, Smucker increased packaged coffee prices of Folgers and Dunkin' Donuts branded coffee products by an average 9% in response to the continuous hike in green coffee costs. Later from Jan 2015, Smucker raised the prices for K-Cups in the U.S. by an average 8%.
Therefore, the key driver behind the volume decline was consumer reaction to higher pricing for branded roast and ground coffee offerings in general and Folgers brand in particular. Though the company is positive that volume trends will improve in the second half of fiscal 2015 as compared with the second quarter of fiscal 2015, it will continue to be lower than the last year as it continues to expect a negative impact from higher green coffee costs.
Increasing Pressure on K-Cup Sales: The company’s K-Cup business has been struggling since the second quarter fiscal 2014. Net sales of K-Cup packs decreased in fiscal 2014due to an increase in the number of competitors, including many unlicensed participants that entered the market during 2014. K-cup sales further declined in the first quarter of fiscal 2015, but showed some improvement in the second quarter, owing to gains in Folgers K-Cup and recently launched Café Bustelo K-Cups. However, the company expects K-cup sales volume to decline in fiscal 2015 due to the recent increase in K-cup prices.
Declining Performance in International, Foodservice and Natural Foods Segment: The segment has been experiencing several challenges since the last five quarters due to increased trade spending in the Foodservice coffee business and currency headwinds. In fact, trade spending will continue to impact the year-over-year comparisons at least till the third quarter. The currency impact is also expected to remain a headwind through the end of the fiscal year and into fiscal 2016.
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of SJM. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1028companies covered: Outperform- 15.2%, Neutral- 77.7%, Underperform – 6.0%. Data is as of midnight on the business day immediately prior to this publication.