I liked J.M. Smucker (NYSE:SJM) as one of my favorite food stocks a few months ago, and neither the company nor the stock have done anything to disappoint me since then. While valuation has certainly increased and the packaged food sector is still seeing pressure, Smucker remains a pretty solid idea in a sector that often sports a premium due to its perceived safety in tougher times.
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Fiscal 2013 Off to a Solid Start
Although Smucker's performance was not quite as strong as the headline numbers suggest, this was still a very solid beginning to the fiscal year. Revenue rose 15% as reported, with organic growth of 9% consisting of 6% price/mix improvement and 3% volume growth. To increase price and experience volume growth is a relatively rare feat in packaged food these days, and it underlines Smucker's solid market position. Coffee did all right, with sales up 4% on a 5% increase in volume. Consumer foods were also strong, as the 15% revenue increase was due pretty much entirely to price/mix improvement.
While Smucker's margins were all right relative to expectations, hedging, acquisition costs and "special project costs" do muddy the waters a bit. As reported, gross margin fell two points, while underlying gross margin fell by an extra half point. Reported operating income rose 5%, with adjusted profits up about 6%. Smucker did beat sell-side guesses with its bottom-line earnings, but those hedging gains will likely become a headwind later in this fiscal year.
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Will Turbulence at Rivals Offer Up More Opportunities to Grow?
Smucker has never been afraid of doing deals, and they have been a significant part of the company's long-term growth story. Given all of the restructurings at Kraft (Nasdaq:KFT), Ralcorp (NYSE:RAH), ConAgra (NYSE:CAG) and what used to be Sara Lee, I have to wonder if there will be additional opportunities to pick up leading brands.
The flip side of this scenario is that companies these days are loathe to divest leading brands, and I'm not sure that Smucker (a company that gets 75% of its sales from category-leading brands) wants to pay much for brands that aren't near the top. At the same time, if management thinks it can create some real value, perhaps it can buy a laggard (and pay laggard prices) and build it over time. Keep in mind, though, that emerging market growth (particularly China) is a priority, and that may be where Smucker's M&A money goes.
SEE: Top 6 Factors That Drive Investment In China
Can Smucker Avoid Drought Issues?
Relative to companies like Kellogg (NYSE:K), General Mills (NYSE:GIS) or Kraft, Smucker may be somewhat better positioned to withstand the current drought. The company's large dairy business (Carnation and Eagle) could be vulnerable, but otherwise the company does not seem to have quite the same direct exposure.
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The Bottom Line
I like the fact that Smucker gets so much of its revenue and profits from leading brands, to say nothing of the above-average contributions from the higher-margin coffee business. Better asset efficiency still ought to be a long-term goal, but it's tough to argue with a company that is seeing solid pricing leverage today with little incremental volume impact.
Smucker stock has done pretty well, though valuations don't seem that high yet by backward-looking multiples. On the other hand, while Smucker has brands just as good as those at Kellogg or Nestle (OTC:NSRGF), the company's long-running shortcomings in return on capital should not be ignored. I can see a case for these shares going up and past $90, but I'd hesitate to chase it today.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.