Streetwise

Lauren Rudd

Sunday, November 25, 2012

Try Some Jam With That Turkey

In last week’s column, I wrote that each year about this time I offer up 12 investment ideas, the performance of which I then review a year later. The list is designed to be a catalyst to stimulate ideas and thinking on your part about possible sectors and companies you might want to investigate.

While I appreciate the interest and value many of you seem to place on the list, to those who requested a copy of the list in advance; you know that would not be fair or ethical. Even Diane, my better half, never knows what stock(s) will be talked about in a column prior to publication.

So continue with your own research and after the Thanksgiving holiday, in the first column of December, we will see how my picks of last year performed. At the same time, I will offer up another list of 12 companies for your investing pleasure.

Meanwhile, Thanksgiving dinner is but a pleasant memory and the world has officially kicked-off the holiday shopping season. Now I know what you are thinking...how about an investment idea to go with all that leftover turkey.

One company that comes to mind, particularly after Thanksgiving and one that I have not written about for a while is J.M. Smucker. Most consumers know the company for its jam and somewhat more recently peanut butter. Yet, it receives more revenue from coffee than from either of those two products. Actually, Smucker manufactures and markets a large variety of branded food products.

For example, its portfolio includes not only the aforementioned coffee, peanut butter, jams, but also such items as shortening and oils, baking mixes and ready-to-spread frostings, canned milk, flour and baking ingredients, juices and beverages, frozen sandwiches, toppings, syrups, and pickles and condiments.

And its financial results are just as tasty. Last quarter Smucker saw a 6 percent increase in coffee sales with the key element being the ever increasing popularity of the company's K-Cup lines for Green Mountain's home brew machines. A drop in price of green coffee beans meant that Smucker was able to increase its earnings from coffee by 13 percent over the previous year. The company also benefited from a K-Cups price increase.

However, the sledding will be more difficult going forward. Starbucks' Via home brewing machine is now available, meaning the outcome for K-Cups is either an increase in sales from the increase in home brewer visibility or a decrease due to the new competition. Either way, Smucker’s revenue will see an impact over the holiday quarter.

Looking at fiscal 2013 second quarter ended October 31 financials, Smucker’s acquisition of Sara Lee and a favorable sales mix resulted in an 8 percent increase in sales. However, the aforementioned price decline for coffee offset increases on peanut butter. While overall volume based on weight and excluding acquisitions, decreased 2 percent when compared to 2012, the Company’s gross profit increased by $43.2 million, or 9 percent, due in no small part to a 33.4 percent gross profit margin.

Operating income rose by $35.9 million in the second quarter, while cash provided by operating activities increased by $64.7 million. The net result was a 6 month increase in cash from operating activities of $299.7 million, primarily due lower inventory costs. 

Capital expenditures decreased $37.2 million in the first six months of 2013, and combined with the increase in cash provided by operating activities resulted in a $336.9 million increase in free cash flow over the same period.

For fiscal 2013, the Company expects net sales to increase approximately 7 percent, while non-GAAP net income per share is expected to range from $5.12 to $5.22 per share.

The intrinsic value of the shares, using a discounted earnings model with a growth rate of 12 percent and a discount rate of 12 percent is $97. The more conservative free cash flow the firm approach yields an intrinsic value of $165 per share.

My estimated earnings target for this fiscal year is $5.20 with a 12-month target price on the shares of $95, for a capital gain of 12.4 percent over the recent closing price of $84.89. In addition, there is an indicated dividend yield of 2.5 percent.