Cheap Peanuts Could Mean Profits for Smuckers

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Farmers have lots of peanuts to sell in 2012, even after the drought withered many other crops. The Associated Press reported that crop levels could be as much as two thirds higher than last year, which could mean cheaper peanuts for peanut buyers. With other food costs skyrocketing, Smuckers (NYSE: SJM) could attract shoppers with cheap peanut butter and rack up higher sales.

The gigantic peanut crop could change some analysts' expectations. Los Angeles Times reporter David Lazarus explained that peanut crops were hit by droughts in 2010 and 2011, and some grocery stores even limited peanut butter purchases due to concerns about a 2012 drought. Although the drought damaged crops in many states this summer, Southeastern peanut crops avoided its worst effects.

Smuckers has a very strong position in the peanut butter market with the Jif, Goober, and Laura Scudder brands, as well as peanut butter it sells under its own Smuckers label. Bloomberg Businessweek reports that Jif has outsold other peanut butter brands in the United States for 31 years. Smuckers has kept up to date on the health trend. Natural and organic versions of Smuckers peanut butter show up on shelves, and Smuckers also owns the healthy juice brand R.W. Knudsens.

If shoppers switch to peanut butter and jelly sandwiches, Smuckers' sales could rise even higher. Smuckers sells many types of jams and jellies, including the premium Orchard's Finest brand. The Orchard's Finest preserves don't contain high fructose corn syrup, which some shoppers try to avoid. Cheaper peanut butter could free up some room in shoppers' budgets for Orchard's Finest.

Smuckers reported stronger recent sales growth than Treehouse Foods (NYSE: THS). Smuckers reported 15% revenue growth last quarter, and it has a P/E of 21. Last quarter, Treehouse Foods reported 7.1% higher sales, and currently has a 20 P/E. Treehouse Foods sells jam under the E.D Smith brand, so a shopper-switch to peanut butter and jelly sandwiches could also help this company. The E.D. Smith web site also displays jams without high fructose corn syrup, and the company goes into great detail about its efforts to avoid adding common allergens to its jams.

Smuckers' revenue growth also beats two other food makers with similar P/E ratios. Unilever (NYSE: UN) has a P/E of 20 and reported 11.5% revenue growth. Unilever owns the Skippy peanut butter brand, which comes in second by market share (behind Jif) in the United States, so this Smuckers rival may also benefit from lower peanut costs. Bloomberg reporters David Welch and Matthew Boyle reported that Unilever recently considered selling Skippy, and Smuckers' strength in the United States peanut butter market may have factored into this decision. Flowers Foods (NYSE: FLO) has a P/E of 22 and reported 6.1% revenue growth last quarter, and cheap peanuts could help this baker as well. If cheap peanuts convince shoppers to make more peanut butter and jelly sandwiches, Flowers Foods could sell more bread.

Investors will find out whether Smuckers sold more peanut butter and jam when the company reports on Nov. 16. expects earnings of $1.44 per share, and notes that Smuckers beat the consensus estimate 80% of the time over the last ten quarters. Cheap peanuts could help Smuckers beat the estimates again this quarter. With a P/E close to other food companies that reported weaker growth last quarter, and a dominant market share for a product that could attract budget conscious shoppers, Smuckers offers some tasty investment potential right now.  

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