A Sweet Investment in Food

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J.M. Smucker(NYSE: SJM) has been in operation for more than 110 years, offering wholesome and high-quality products. Yet the company's financial reality is bitter. Its main products are lower-margin baked and packaged food, which hampers the company's fast growth. As sales of its main products decline, Smucker is protecting itself with forays into new sectors such as beverages and organic and natural foods.

Business Metrics

While it's best known for its namesake fruit spread and Jif peanut butter, Smucker has expanded its product portfolio  to include a variety of coffee brands, including Folgers and Dunkin' Donuts. Smucker earns the majority of its revenues by distributing its main products in the United States and a few other countries.

In the fourth quarter of 2012, the company’s net sales increased by 14% compared to its previous year, thanks to major acquisitions and higher prices.

The acquisition of Sara Lee Food and Rowland Coffee contributed $28.4 million to overall net sales, and increased Smucker's full-year gross profit by 7% year over year.

Net sales increased 5% to $1.23 billion in the fourth quarter, minus acquisitions, divestiture, and foreign exchange. Robust sales growth increased those earnings. The results also surpassed the previous year quarter’s adjust earnings of around $1.00 per share.

Competitive Peers

Smuckers' rivals include ConAgra Foods (NYSE: CAG) and Mondelez International (NASDAQ: MDLZ).

ConAgra is one of the largest manufacturers of potato and vegetable products with seasoning and grain ingredients in the industrial markets. The company operates in a highly competitive industry with highly sensitive customers. Thus, even as ConAgra's costs increased, it had to reduce its prices, narrowing its margins.

ConAgra Foods competes more on the basis of value, brand recognition, quality, and brand loyalty. Its revenue for the most recent quarter increased 8.9% year over year to $3.73 billion. Thus, looking at the market share, Smucker has a better hold.

Mondelez International manufactures and markets beverages, snacks, cheese, and various packaged grocery products. The firm is trying to improve its long – term results by mainly focusing on the cost-savings , brand support and cash generation. It has an annual revenue of approximately $36 billion compared to its competitors which is very low.

By 2013 and 2014, Mondelez International plans to increase the capital investments, reduce costs and improve efficiency by approximately 5% of net revenues to support further growth. It is targeting of 2.5% of its efforts that provide more cash to invest in brand building, marketing initiatives and innovation. This step will be a great payback to shareholders in the form of dividends. I have a neutral recommendation for this stock since the quality of the underlying revenue and the earnings growth was quite disappointing last year.

Forward looking Statement

There is no such company that competes with Smucker in all its food products. It is becoming an international food company with three major categories representing coffee, peanut butter and fruit spreads. The firm is confident about its ability because of the high quality products it offers to the consumers, its brand name, and a variety of products which is quite innovative. It has a good distribution network all over the world. I believe JM Smucker is a sound long term investment. It is a good dividend growth stock as well.

The company expects to incur special project costs to settle down certain pension liabilities. Compared to 2012, net sales are likely to increase approximately by 7% for fiscal year 2013. The expected net sales in 2013 is seen from Sara Lee business. The next dividend increase is supposed to be in August 2013.

My personal opinion of the stock is highly recommended since it has got a history of good returns. It also shows a clear strategy of owning brands of strong portfolio. It is looking forward to acquire 8-10% of market share in next 5-7 years. The company is introducing new jobs which shall bring economic stability. The acquisition of Folgers has helped the company to leverage the distribution and sales. It is on track to achieve $80 million within the first eighteen months of owning the coffee business. This shall enable the company to grow the profitability at a faster rate.

 





Binu Buvaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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