With A Name Like Smucker's, The Stock Has To Be Good

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J.M. Smucker (NYSE: SJM) continues to outperform the market. The company blew away earnings estimates, reporting $1.29 per share versus expectations of only $1.15. Gross margin improved to 36.1% from 33.7%. Sales for the entire year came in at $5.9 billion, 7% better than the previous year. All in all, it was a great report from the company and the outlook for the rest of the year looks favorable.

I like J.M. Smucker for more than just it's products

J.M. Smucker has products in every American pantry. The company produces Folger's coffee, Smucker's jam and preserves, Jif peanut butter, Crisco, Pillsbury, and Carnation milk. Over the past year, J.M. Smucker launched 70 new products into the marketplace including hazelnut Jif, Smucker's natural fruit spreads, and new flavors of Pillsbury frostings and baking mixes. The new line of foods and flavors allowed the company to increase market share in its key categories. For the upcoming year, the company plans to launch over 100 new products.

J.M. Smucker continues to be a very shareholder-friendly company. Last year the company raised the annual dividend by 9% and spent $360 million to buy back shares. The annual dividend is now $2.08 per share for a yield of 2.1%. The dividend payout ratio is 42%. Over the past year, the stock is up over 34%, beating the return of the S&P 500.

Key partnerships

J.M. Smucker has two key partnerships in the coffee business that can provide serious growth for the company. The first is with Dunkin Brands (NASDAQ: DNKN) and their Dunkin' Donuts franchise. J.M. Smucker produces the Dunkin' Donuts brand coffee that is seen on supermarket shelves. As much as Dunkin' Donuts is known for its donuts, the company is really a coffee company. More people go to Dunkin' Donuts for their coffee, and the donuts are an afterthought. With J.M. Smucker, devotees of Dunkin' Donuts coffee can now brew their own at home.

J.M. Smucker continues to innovate to grow the Dunkin' Donuts line of coffee. This year the company will incorporate a new “bakery series” that will have some of the Dunkin' Donuts signature donut flavors. Among those flavors offered will be blueberry, jelly and chocolate.

The partnership with Dunkin Brands is showing solid growth for J.M. Smucker. In the latest quarter, sales for Dunkin' Donuts coffee rose 11%. Sales for its Folgers coffee only rose 3%.

J.M. Smucker benefits from Dunkin Brands' continued expansion. At the end of the first quarter of this year, Dunkin Brands had approximately 10,500 Dunkin' Donuts in 38 states, the District of Columbia, and 31 other countries. More are on the way and that increases the exposure for those wanting Dunkin' Donuts coffee and helping J.M. Smucker sell more Dunkin' Donuts coffee in the grocery aisle.

The growth for J.M. Smucker is in the premium coffee segment, and the company has a second partnership to capitalize on this trend with Green Mountain Coffee Roasters (NASDAQ: GMCR). J.M. Smucker has a partnership with Green Mountain to produce J.M. Smucker coffee brands for the ever-popular K-Cups. K-Cup sales contributed $290 million in revenues last year. This year the company will introduce new flavors of K-Cups in the United States and Canada.

Sales growth for K-Cups came in at 18% in the latest quarter, and sales for K-Cups are projected to increase 15% this year. What I like most about this business is that two years ago it didn't exist--J.M. Smucker and Green Mountain Coffee formed the partnership in February of 2010. The partnership gives J.M. Smucker the ability to sell its branded K-Cups through its distribution channels. Green Mountain Coffee can sell K-Cups with J.M. Smucker coffee brands through its website. It's a win-win for both companies in the fast-growing single-cup coffee business. J.M. Smucker benefits because Green Mountain Coffee is the market leader in the single-cup coffee business with its Keurig machine.

Over the past year Green Mountain has been on a tear, rising over 256%. Even though the company is rapidly growing, new entrants are coming into the single-cup business, and Green Mountain Coffee is dependent on retaining its position in the single-cup business. In the long-term I like Green Mountain coffee, but investors should consider waiting for a dip to initiate a position.

How the 3 companies stack up

<table> <tbody> <tr> <td> </td> <td> <p><strong>J.M. Smucker</strong></p> </td> <td> <p><strong>Green Mountain Coffee</strong></p> </td> <td> <p><strong>Dunkin Brands</strong></p> </td> </tr> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$10.87 billion</p> </td> <td> <p>$11.35 billion</p> </td> <td> <p>$4.42 billion</p> </td> </tr> <tr> <td> <p><strong>Revenue</strong></p> </td> <td> <p>$5.91 billion</p> </td> <td> <p>$4.16 billion</p> </td> <td> <p>$667.67 million</p> </td> </tr> <tr> <td> <p><strong>Gross Margin</strong></p> </td> <td> <p>0.34</p> </td> <td> <p>0.35</p> </td> <td> <p>0.79</p> </td> </tr> <tr> <td> <p><strong>EBITDA</strong></p> </td> <td> <p>$1.21 billion</p> </td> <td> <p>$881.57 million</p> </td> <td> <p>$313.12 million</p> </td> </tr> <tr> <td> <p><strong>Operating Margin</strong></p> </td> <td> <p>0.16</p> </td> <td> <p>0.16</p> </td> <td> <p>0.39</p> </td> </tr> <tr> <td> <p><strong>Net Income</strong></p> </td> <td> <p>$513.54 million</p> </td> <td> <p>$405.19 million</p> </td> <td> <p>$106.11 million</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>21.51</p> </td> <td> <p>29.28</p> </td> <td> <p>44.20</p> </td> </tr> </tbody> </table>

Foolish assessment

Of the three companies, I like J.M. Smucker the most. It is more diversified than the other companies with its many food products. By owning J.M. Smucker, you get exposure to both Green Mountain Coffee and Dunkin Brands.

With Green Mountain as cheap as it's ever been, many investors are wondering whether this is the end of the former market darling, or the perfect entry point for an enormous rebound. You can find The Fool's recommendation for how to play the company in this premium research report. In it you'll find everything you need to know about Green Mountain, including whether it's a buy at today's prices. Click here for instant access.


Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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