Thursday, July 07, 2011

Is JM Smucker Good For Your Investment Portfolio?

As the old tag line goes, "with a name like Smucker's it has to be good!" I featured JM Smucker (SJM) -- the $8.7 billion market capitalization maker of coffee, peanut butter, shortening and oils, fruit spreads, canned milk and baking mixes -- in my 2003 book, Value Leadership, as a solid corporate citizen that treated its employees and communities well and came up with some successful product innovations.

Since the book's Sept. 19, 2003 publication, Smucker's stock has risen 81%, compared to 12% decline for the S&P 500. Should you add Smucker to your portfolio?

Here are three reasons to consider adding it:
  • Long-term financial strength. Smucker has grown rapidly. Its $4.8 billion in revenues have increased at an average rate of 17.5% over the last five years although its net income of $475 million has risen at a 27.1% annual rate over that period. A negative is that its $1.3 billion in 2010 debt rose at a 34.9% annual rate since 2006 while its cash grew at a 12.5% annual rate between 2006 ($200 million) and 2010 ($320 million).
  • Strong fourth quarter performance. Smucker beat earnings and raised revenue estimates. Its fourth-quarter profit of $94.9 million was down 21% from the year before but its $1.00 a share, adjusted earnings beat analysts' average estimate of 99 cents a share by a penny, according to Thomson Reuters I/B/E/S. Due to higher prices -- it raised coffee prices by a third in the year ending May 2011 -- and its recent acquisition of espresso coffee firm Rowland Coffee Roasters, Smucker forecast a 20% sales rise to $5.8 billion for the year -- 12.4% above analysts' $5.16 billion estimate. But that won't keep up with its 25% rise in cost of products.
  • Attractive dividend yield. Smucker's 2.3% dividend yield up an average of 2.4% a year over the last five years is a nice bonus.
Here are two negatives for the stock:
  • Under-earning its capital cost. Smucker earned less after-tax operating profit than its cost of capital and it has negative EVA Momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In 2010, Smucker's EVA momentum was -1%, based on 2009 revenue of $4.6 billion, and EVA that declined from $10 million in 2009 to negative $25 million in 2010, using a 7% weighted average cost of capital.
  • High valuation. Smucker's price to earnings to growth (PEG) ratio of 1.85 makes it quite expensive (a PEG of 1.0 is considered fairly priced). Smucker's P/E is 16.3 and its earnings are expected to grow 8.8% to $5.60 in 2012.
While the dividend looks tempting -- the negatives on this stock may quietly creep up on it. For example, higher prices could make consumers buy less and with its higher input costs, the result could be a disappointing earnings performance on this expensive stock. I am also concerned about its growing dependence on debt-adding acquisitions for its growth.
It looks like a good company that has enjoyed most of its upward stock run.


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