Smucker Fighting A Number Of Headwinds

By Ryan C. Fuhrmann | June 14, 2011 AAA

Branded food marketer and manufacturer J.M. Smucker (NYSE:SJM) posted fourth quarter profits ahead of analyst projections late last week. As a result, its stock is bumping up against its highs over the past year. Longer-term, concerns exist over Smucker's organic growth levels, and nearer term the company is fighting against higher commodity costs that form the basic ingredients for its coffee, jam and peanut butter brands.

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Full-Year Recap
Sales advanced 5% and reached $4.8 billion. By segment, U.S. retail coffee sales jumped 14% to account for more than 40% of total sales as the acquisition of Folgers from consumer giant Procter & Gamble (NYSE:PG) in November 2008 boosted reported sales earlier in the year, as did a series of price increases. The special markets segment represents sales made outside of the United States and reported 5% growth to account for nearly 20% of sales. The final two operating units are U.S. consumer and U.S. oils and baking, which reported low single-digits sales declines to represent 23% and 19% of sales, respectively. (For related reading, see A Look At Corporate Profit Margins.)

Segment profit growth was stronger than the sales increase, rising 6.8% to $1.1 billion, or a very healthy 23% of sales. The international segment led the way with a 14.4% increase and was followed by U.S. retail coffee, which reported 11% profit growth. U.S. retail consumer logged a modest 3.4% improvement while retail oils and baking was again a laggard, reporting an 8.8% profit decline.

Backing out corporate overhead, operating income fell 1% to $784.3 million. Higher interest expense sent net income down 3% to $479.5 million, or $4.05 per diluted share. A rise in inventories and income tax payments sent operating cash flow down more than 45% to $391.6 million, and backing out CAPEX resulted in free cash flow of $211.5 million, or only about $1.79 per diluted share. (For related reading, see Investors Beware: There Are 5 Types Of Earnings Per Share.)

For the coming year, management projects sales will increase 20%. This amount includes the acquisition of Rowland Coffee Roasters. Its current earnings guidance is between $5 and $5.15 per diluted share, though this excludes $0.55 and $0.60 per diluted share in "special project costs" that management considers will be one time in nature.

The Bottom Line
At the current share price, Smucker trades at more than 15 times forward earnings, not including the special charges it anticipates for the full year. Rising commodity costs are a near-term concern to profit levels, but the longer-term concern is how fast sales can grow organically. Packaged-food rival HJ Heinz Co. (NYSE:HNZ) is in a similar position and trades at a slightly higher forward earnings multiple. Unilever (NYSE:UN) (NYSE:UL) is trading at a more reasonable multiple of less than 14, while P&G is at more than 15.

Both larger rivals have higher dividend yields than Smucker, while P&G in particular has a better track record at posting profitable sales growth. Unilever has relied on cost-cutting to move profits forward, and its larger size should allow it to offset higher commodity costs better than Smucker. (For related reading, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)

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