Streetwise

Lauren Rudd

Sunday, December 1, 2013

A Turkey Side Dish

In last week’s column I discussed how each year in December 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 potential investment candidates rather than a working portfolio.

I appreciate the interest and value many of you seem to place on the list. However, to those who requested a copy in advance; you know that would not be ethical. So continue with your own research and after the Thanksgiving holiday we delve into how my picks of last year performed. At the same time, I will offer up another list of 12 companies for your investing pleasure.

Now I know what you are thinking...how about one investment idea to go with Thanksgiving turkey. OK, a company that comes to mind this time of the year is J.M. Smucker (SJM). Most of you probably know the company for its jam and 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 and 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...or at least they used to be. When I wrote about the company a year ago my earnings target for the fiscal year ended April 2013, was $5.20 with a 12-month target price on the shares of $95. Earnings for the year came in at $5.37 and the shares recently closed at $103.95, producing a one-year capital gain of 22.45 percent.

Nonetheless, the company has become a bit controversial since the recent release of its fiscal second quarter results, ended October 31. Revenue came in lower than expected as a combination of reduced commodity costs and Smucker’s reduced selling prices failed to translate into sales growth.

The recent numbers showed sales for the quarter fell 4 percent to $1.56 billion, despite lower wholesale prices of green coffee and peanuts. Retail coffee sales fell 4 percent in dollar terms due to the price reductions offered by Smucker. Nonetheless, sales by volume of Folgers were up one percent and 11 percent for its Dunkin' Donuts packaged coffee.

Retail consumer food sales, Smucker’s largest business by revenue, fell one percent in the quarter because of the aforementioned price reductions. But again volume was up in certain products. For example, Jif peanut butter volume rose two percent while Crisco oils increased four percent.

During the quarter, Smucker’s net income rose three percent to $153.4 million, or $1.46 per share. If you exclude one-time items, the company earned $1.52 per share. Gross margins rose to 35.4 percent from 33.3 percent. For fiscal 2014, the Company now expects net sales to decrease by approximately two percent when compared to 2013, due primarily to lower K-cup coffee sales.

Other than Smucker, Green Mountain Coffee Roasters licenses K-cups to Starbucks, Eight O'Clock, Kraft, Maxwell House, Gevalia and many private label companies. So it is not too surprising that Smucker, which was among the first to offer coffee in K-cups, has felt the impact of increased competition.

The Company still expects earnings to remain in the previously announced range of $5.72 to $5.82 per share, excluding special project costs of approximately $0.20 per share.

The intrinsic value of the shares, using a discounted earnings model with an earnings growth rate of 9 percent and a discount rate of 12 percent is $98 due to lower earnings. The more conservative free cash flow the firm approach yields an intrinsic value of $126 per share.