The J.M. Smucker Company (NYSE: SJM) was founded in 1921 and is now the 8th largest shelf-stable food and beverage manufacturer in the United States. The company has a leading share in coffee, nut butter, dog snacks and fruit spreads amongst retailers. Over the years, management has wisely used acquisitions and strategic innovation to build-out the company’s product portfolio. Smucker’s manufactures and markets iconic brands including Crisco, Folgers, Hungry Jack, Jif, Kibbles n Bits, Milk-Bone, Pillsbury, Sahale, Santa Cruz Organic and Smucker’s spreads. Over 90% of the company’s revenue comes from within the U.S. but management is focused on growing the company’s international presence in Canada, China and Mexico. For FY2015 Smucker’s had $5.69 billion in net sales.
Reliable Dividend Growth Play
On 12/1/2015, Smucker’s paid a quarterly dividend of $0.67 per share, flat relative to the previous quarterly dividend but up about 5% year-over-year. Since the company’s first quarterly dividend payment of $0.13 per share on June 2, 1997, dividends are up about 415%. The company has an annualized dividend of $2.68, up from $2.44 (10% growth) in 2014 and $2.20 (22% growth) in 2013. Smucker’s has delivered 13 years of consecutive annual dividend increases, with annualized growth of about 10% over the last three years. Smucker’s currently has a dividend yield of 2.18%, below the consumer goods industry average of 2.40%.
Solidly Rising Sales and Profits
For its second quarter of 2016 (three months ended October 31, 2015), the company had net sales of $2.08 billion, up 40% from $1.48 billion in 2Q15. Coffee sales accounted for 28% of total sales and increased 10% while pet foods sales accounted for 27% of total sales and were also up. Actual revenue was in-line with analysts’ revenue estimates even though a significant rise in volumes was slightly weighed down by lower prices. The company reported a 2% increase in gross margins year-over-year. For 2Q16, Smucker’s reported operating income of $313.8 million, up 23%, and net income of $176.0 million, or $1.47 per share, up 11%.
Management Raises Guidance
After another strong quarter, management updated FY2016 guidance. Smucker now expects earnings in the range of $5.70-$5.80 per share (up from $5.65-$5.80) and adjusted earnings in the range of $6.85-$6.95 per share (up from $6.80-$6.95) on revenue of $7.9 billion. Management noted that the new guidance was largely tied to continued synergy realization, increased marketing, lower expenses and more favorable foreign exchange conditions.
Shares Up 24% Year-to-Date, Valuation Multiples Below Peers
As of 12/24/2015, Smucker’s shares traded at $124.78 per share, up about 24% year-to-date. Shares spiked in late March on news of acquisitions and strategic partnerships. Shares are near the top of the company’s 52-week range of $97.28-$125.01, with the high price point on 12/23/2015.
At $124.78 per share, shares have a price-to-earnings ratio of 36.5x on TTM earnings of $3.24 per share. The company trades at a lower price-to-book ratio of 2x relative to its peer median of 2.6x. Jefferies initiated coverage on Smucker’s with a Buy rating and price target of $140 (12% upside) on synergies in its Big Heart Pet pet-food business, continued organic growth, revenue gains from its Dunkin’ Donuts partnership and strong free cash flow that is expected to strengthen the company’s balance sheet. Management plans to lower leverage, from 4.1x in FY2015 to 2.1x in 2019. Smucker’s has a median analyst price target of $131 representing upside potential of 5%.
Key Strategic Partnerships Should Boost Sales
In February 2015, Smucker’s announced a partnership with Dunkin’ Brands Group (DNKN) and Keurig Green Mountain (GMCR) to exclusively produce Dunkin’s K-cup instant coffee pods for retail locations including club stores, dollar stores, drug stores, grocery stores and online in the U.S. and Canada. The multi-year agreement will boost revenues at all three companies and give Smucker’s an added play in the growing premium coffee segment.
In March 2015, Smucker’s announced the completion of its $6 billion cash and stock acquisition of Big Heart Pet Brands, a leader in branded pet foods and snacks. This acquisition gives Smucker a strong leadership position in the pet food industry.
In November 2015, Smucker’s divested its canned milk brands, most notably its U.S. based Eagle and Magnolia brands, to Eagle Family Foods Group LLC. Canned milk products accounted for about $200 million in annual net sales. As part of the deal, Eagle Family Foods will also take control of related manufacturing facilities in Missouri and Texas. Smucker will still own brand rights and operation of its canned milk products in Canada.
Management Focused on Growth, Encouraging Young Leaders
As part of the company’s continued focus on long-term growth, Smucker’s Board appointed several new executives to senior leadership positions. Effective March 1, 2016, Barry Dunaway, President – International and CAO, will be promoted to President – Big Heart Pet Food and Snacks. David West, current President of Big Heart Pet, will become a strategic advisor to Smucker’s Executive Committee and remain on the company’s Board. Additionally, Senior VP and CFO Mark Belgya will assume several new responsibilities including government and industry affairs, information services and corporate strategy, effective January 1, 2016. Board member and Vice Chairman Vincent Byrd announced that he will retire on June 10, 2016, after 39 years with the company. Byrd will continue to oversee the integration of the Big Heart Pet Brands acquisition to promote further synergies until his retirement date.
Management’s focus on growth and cost controls has paid off for shareholders. The Big Heart Pet Brands acquisition continues to deliver impressive synergies, estimated at $25 million for FY2016 and expected to increase to $200 million by FY2018. Additionally, the acquisition has boosted revenue growth and given Smucker’s a leading presence in the pet food industry. Lower expenses have improved gross profit margins and driven income growth, with Smucker’s beating earnings estimates of $1.51 per share by 7%. Management’s upgraded guidance is also a positive for shareholders and should boost shares in 2016. Smucker’s strong stock performance relative to its peers reflects its industry leadership and pricing power. As a blue chip company, Smucker’s is expected to continue delivering solid payouts to shareholders through dividends, earnings growth and share price appreciation.
I view Smucker’s equity as a blue chip story with an intentional divesture and acquisition business model. These actions ensure Smucker’s improves its brand names, removes slower growth brand names, and increases the operating income for the overall company. The company buys brands to improve earnings’ and improve revenues. Management is focused upon building shareholder value, researching ideas for new product lines, and disposing brand lines that are not carrying their weight in the Smucker’s aggregate business model.