Mea Culpas: How Companies Deal

By AnnaLisa Kraft - October 22, 2012 | Tickers: BP, SJM, JNJ, MDLZ | 0 Comments

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When companies have to undertake recalls, it is not done lightly. Aside from the human aversion to admitting mistakes, a recall can be costly, as was the case with the Tylenol recall in 1982 of millions of bottles of Tylenol by Johnson & Johnson (NYSE: JNJ). But CEO James E. Burke manned up and made the call that customer safety was paramount and nobody else would die on his watch from cyanide laced Tylenol. Although there were only seven documented deaths, the case remains unsolved to this day. That decision cost the company upwards of $100 million.

His decision changed packaging forever on over-the-counter drugs and many other food products as well. It is still used in B-schools as an example of corporate responsibility. While J&J shareholders may bemoan the company's many recent recalls as just plain "sloppy" manufacturing and lax oversight, more than likely the late Mr. Burke would have done the same.

Now there is another major recall of peanut butter and peanut containing products from Sunland New Mexico factory that has been linked to salmonella. The original news came out on September 24 but it took The J.M. Smucker Company (NYSE: SJM) several weeks to notify school systems. According to an AP story the company knew of a limited run of Uncrustables (PBJ frozen sandwiches) made with Sunland's peanut products and destined for federal school lunch recipients that had been factory tested but out of an excess of caution contacted the schools. The question should be since the Sunland recall broke almost a month ago, why did it take so long to notify school systems? If they suspected immediately and did notify school systems at that time, why the press release now? After the 2011 recall of competitor Peter Pan peanut butter due to salmonella and a previous 2009 peanut product recall, Smucker's should have been all over this to reassure clients and consumers.

There are good and bad ways to handle such predicaments. The worst way is to procrastinate, make excuses, deny, understate etc., the BP (NYSE: BP) Deepwater Horizon Gulf disaster (also called the Macondo oil spill) being a particularly poignant example. A timeline of the disaster shows the company cutting corners against all advice and ignoring warnings before the tragedy and then afterward backpedaling, blaming, doing everything wrong. It was mishandled until then CEO Tony Hayward resigned and new CEO Bob Dudley started to "do the right thing," public relations wise and ethics wise.

Immediately after the disaster the stock dived, as well it should have, but when Dudley starting trying to make things right eventually the stock recovered some as did Johnson & Johnson a year after the Tylenol recall. BP still hasn't returned to its 2007 highs in the $70's but it's almost up 50% since the disaster.

My point being is that there is a continuum of proactive to reactive to denial. J&J was proactive, Smucker's was somewhere between proactive and reactive, and BP was in denial. BP and J&J are textbook examples, almost the "Goofus and Gallant" respectively, of dealing with a problem.

Johnson & Johnson is at a 52 week high now and pays a 3.40% yield. It's considered a defensive drug sector stock but also has some consumer staple exposure. The P/E is a little high at 23.54, but it has so many products in its pipeline and just reported good Q3 results on Oct. 16 with sales of $17.1 billion, a 6.5% improvement over Q3 of 2011. However, there were almost 15 recalls of various products company-wide from 2008-2011, even after the appointment of Ajit Shetty as companywide "czar" for quality control in Aug. 2010. One imagines there are large posters at J&J company plants " --- many days since last recall."  The company is not the growth stock that Pfizer is, but when it makes an honest mistake, at least it owns up to it. The problem is that there are too many honest mistakes.

BP is more than 10% off its 52 week high of $48.34 and pays a 4.40% yield. The company has an 8.01 P/E and without CEO, "Mr. Smug" Hayward, has been trying to earn back public trust. It's paying a higher dividend yield than main competitors Chevron and Exxon and it seems that they may have learned their lesson. There are still likely to encounter legal challenges, but the worst is behind them.

To me, the jury's out on Smucker's, it has performed well but has had a big run. It pays a yield of 2.40% and has a 20.78 P/E. Members of the Smucker family, including CEO Richard Smucker, still own 3 million shares. The top institutional holder is Vanguard with some 7 million shares. The Orrville, Ohio based company (cozily headquartered at One Strawberry Lane) has taken a small family run jam operation to a food giant, even owning Folger's, the number one coffee brand, as well as numerous smaller brands in its product inventory, including Jif peanut butter. It reports November 16. Comparing it with Mondelez International (NASDAQ: MDLZ) which is considered a more direct competitor than Kraft, Smucker's has a higher P/E than Mondelez' 13.43 and a much smaller yield than Mondelez' 4.20%. I think Smucker's may be rocking on the porch indulging in its folksy image as upstart IPO Mondelez is "moving on up." We shall see when Mondelez reports November 7.

But I digress, when companies make mistakes they may be tarred with the same brush as a competitor, especially when it involves public safety they need to be very proactive with their public relations. I think Smuckers was lucky this time, but they should have done better  considering the history of peanut product recalls in the last few years. So, I would advise caution with Smucker's, while not a crisis for itself, it might not handle a real crisis much better.

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