Browse > Home / Cons. Staples, Equities / Capitalize on In Home Dining: JM Smucker

Capitalize on In Home Dining: JM Smucker

Posted on: October 30, 2008 - Email Article - Printable Version

Vinay Ayala

About the Author:

You wake up in the morning and put the bread in the toaster; it pops up nice and warm; and your good old buddy JM Smucker strawberry jelly (or blueberry if you prefer) is waiting there to be spread over the toast and be enjoyed by everyone in the family. During tough economic times, families tend to stay at home and eat, whether it be for be for breakfast, lunch or dinner, the Consumer Staples sector will tend to benefit from this trend. As unemployment continues to rise, the housing market continues to deteriorate and people have less disposable income, families inclination to stay at home will become even stronger. The J.M. Smucker Company [SJM: 43.99, +0.15 (+0.34%)] is a perfect example of a company that will thrive in this type of environment.

Company Description

The J.M. Smucker Co. is a leading producer of fruit spread products, organic foods, beverages, ice cream toppings, baking & oils materials and peanut butter. The company operates in 2 segments. The first is the US retail segment, which accounted for 74% of sales in the last fiscal year. This segments consists of the following divisions with their respective contribution to sales: Fruit spreads (13%) , peanut butter (19%), uncrustable sandwiches (5%), ice cream toppings & syrup (4%), potatoes and pancakes and Baking & Oils (24%). The company also has a special markets segments, which has has the following divisions: Canada (which had 35% year over year growth and has benefited from the acquisition of Eagle Brands and Carnation), the food-service division, beverages, and international customers . International customers accounts for about 13% of sales.

Strong Brand Market Position

Often, one of the strongest indicators of a solid Consumer Staples company is brand equity and position in the marketplace. With 10 of their brands having the #1 market share in their respective markets, JM Smucker is well positioned to continue to realize strong sales due to this continuing strong brand equity. While private label items can pose a problem, the inclination of people to stay at home and eat during this economic downturn plays right into the hands of SJM as their products are meant for in home dining. While some have been worried about the private label items, even they have been forced to increase costs due to the recent run up in commodities and has narrowed the price gap between products. This should add another advantage to JM’s portfolio of leading brands. With an 18% increase in sales and 12% increase in net income year over year they are continuing to building their brand as the leader in their respective markets. In fact Jif, their most significant contributor to their bottom line, increased volume by 7%. This translated into a full percentage point increase in market share. In 2009 the firm will also be expanding their Crisco oil brand into the west US, which should help building market share and sales for that brand.

Strategic Acquisitions

At the beginning of 2003 when the company set out on a $69 million restructuring project “to refine its portfolio, optimize its production capacity, improve productivity and operating efficiencies, and improve the Company’s overall cost base” they embarked on their strategic vision of owning and marketing #1 food brands in North America. Since 2003 they have more than doubled sales and gained strong market share in an extremely competitive environment. This has largely been due to smart acquisitions since 2002.

Acquisition of Jif and Crisco from Procter & Gamble [PG: 62.35, 0.00 (0.00%)] in 2002 - The acquisition of these two brands really began to pave the way for JM Smucker as they acquired two #1 market share brands that have contributed over 25% to their bottom line in 2008. According to the company, since the acquisition “Jif has experienced an annualized sales growth of 7 percent, increased its share of market by 7 share points, and introduced a variety of new products.”
Acquisition of International Multifoods Corp in 2004 - This acquisition added Pillsbury and a variety of other baking products which now constitute over 10% of sales for JM. This further highlighted their ability to acquire and grow the brands that they choose to acquire. Their strategy comes into full view here as it is obvious that their acquisitions are made carefully so that they fits into their strategy of owning #1 brands in North America.
Acquisition of Eagle Family Foods Holdings in May 2007 - While the Eagle business has traditionally lower margins than the rest of JM’s brands, it is another brand with #1 market share and has been the biggest factor in increasing their growth in Canada, which came in at 35% year over year.
Acquisition of Folgers from Procter & Gamble in October 2008 - The all stock deal valued at $2.95 billion marks the addition of tenth top brand that Smucker offers and nearly doubles the size of the firm. Given their strong acquisition history and the ability to realize synergies from prior transactions, Folgers seems like a perfect play for SJM. It not only fits in with their strategy, but it also integrates their products as they can further serve the in-home breakfast dining market, as people can lay JM Smucker peanut butter, jelly and coffee on the table. As part of the deal Procter & Gamble now owns 53.5% of JM Smucker and the firm will issue a special dividend of $5 per share to shareholders as of record before the deal.

Lower Commodity Costs

While management expressed concern over high commodity prices, the recent pullback in commodity markets allows all consumer staples companies to benefit. Looking at the chart at the right, you can see that as the price of common commodity inputs decrease there is a proportional decrease in the cost of goods sold, which can only mean good things for companies bottom line. I expect JM Smucker to fully realize the benefit from this trend and see margins improve slightly in the future. These margins were hurt last year due to higher commodity prices.

Risks

There are a few risks associated with SJM:

Restructuring costs - the firm still has about $10.5 million in restructuring costs to realize over the next few years. If these costs turn out to be higher than expected it will negatively impact the bottom line.
Failure to successfully merge brands - their acquisition strategy leaves the firm vulnerable to the fact that they may not be able to realize their projected synergies, which could hurt the overall brand recognition of their entire portfolio.
Commodities and foreign exchange - While they are hedged against these risks, if they have hedged the wrong way on any of these investments, it could backfire for the firm and result in losses.

Recommendation

P/E: 14.99x
P/E (forward): 12.53x
Debt/ Equity: 0.43x
Price/ Book: 1.4x

At these price levels I believe that SJM is slightly undervalued in relation to their competitors given their strong market presence, margins, ROA and ROE. As mentioned before, they should greatly benefit from the downturn in the US economy as discretionary spending halts. We should be able to see how the firm benefits from the pullback in commodity prices and how the average US consumer is responding to the downturn in the economy as well as how it affects SJM when they release earnings on November 21st. They provide a solid defensive play in your portfolio as should most of the consumer staples sector moving forward to the end of 2008.

-Vinay Ayala

Disclosure: The author is long PG

Share or Bookmark This Post: