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With A Name Like Smucker's, Earnings Have To Be Great

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A family-run, century-old Ohio company has been one of the hottest tickets on Wall Street the last few years. Headquartered at One Strawberry Lane, it sounds too cozy and charming to be a 21st century stock on the move. But the J.M. Smucker Company (NYSE: SJM), famous as a purveyor of peanut butter and jellies, is now a large consumer staple brand. If you're cooking for the holidays, you're probably reaching for one of their products.

The stock has more than doubled from its 2009 low in the mid-$30's to a recent all time high of $87.81. CEO Richard Smucker is one of the descendents of the founder, and unlike a lot of family businesses, he runs it as one well-oiled machine. Motley Fool just nominated him as one of the CEO's Of The Week.

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.

Smucker's has a 21.24 P/E and a dependable yield of 2.50%, consistently raised over the years. Smucker's is reporting Q2 earnings on November 16 and the call from this popular defensive consumer staple will be listened to closely. Expectations are running high.

What To Expect

Last quarter, Smucker's reported net, operating, and gross margins dropping across the board, but beat estimates overall for an earnings surprise of 17%. For this quarter, Smucker's has a much higher bar as analysts have revised expectations upward for another double digit increase of EPS to $1.45.

This $9.45 billion market cap company has a 15.20% quarterly revenue growth but a quarterly earnings growth of -0.60% (both year over year). This is in line with what competitors like Kellogg (NYSE: K) and ConAgra Foods (NYSE: CAG) have been saying about commodity costs hitting the bottom line.

The coffee and beverage numbers will be scrutinized closely as coffee is the biggest revenue driver for Smucker's. They own number-one brand Folger's, Cafe Bustelo, home-use Dunkin Donuts, Medaglia D'Oro, Millstone, Pilon espresso, and Kava, an acid-neutralized coffee for people with tummy troubles. With all these brands, Smucker's caters to virtually every flavor of coffee drinker.

The coffee numbers will be compared with Kraft Foods (NASDAQ: KRFT), which just reported on November 7 good numbers for their Maxwell House, Gevalia Coffee and juice drinks. Maxwell House is the main competitor of Folger's.

In January, Smucker's purchased a large part of Sara Lee's coffee and hot beverage business and progress in the integration is another question that needs to be answered.

Coffee numbers may be negatively impacted by the cost of coffee as they were last quarter. However, the peanut butter product sales should offset that as peanuts were cheaper this year. Jif peanut butter contributed to the Q1 beat with higher sales.

Looking Overseas

Smucker's acquired a minority interest in Chinese oatmeal company Guilin Seamild Biologic Technology Development Co., Ltd. ("Seamild") for $35 million in March. This is not expected to be immediately accretive, but it is a new frontier for Smucker's. Analysts will be sure to ask about any more foreign acquisitions in the works.

The International, Foodservice and Natural Foods division reported a 40% gain in sales last quarter and analysts will be looking closely to compare their numbers with Mondelez International (NASDAQ: MDLZ), the international division spinoff from Kraft Foods.

Any Questions?

Smucker's offers a number of all natural juices, sodas, and sports drinks under the R.W. Knudsen's, Santa Cruz Organic, and Natural Brew names. On this front it competes with a number of companies: Pepsi, Coca-Cola, Campbell's, and even Monster Beverage, which all own natural juices and sodas.This is one space where analysts should see good numbers as the trend toward organic and natural foods ramps up year after year.

Those foodservice numbers will be of interest as its Uncrustables brand of PB&J is offered in many school systems' lunch program.

Lastly, expect to hear questions about their debt of $2.07 billion to total cash of $311.47 million. How many more acquisitions and minority interests can they swallow after the Sara Lee coffee purchase and Chinese oatmeal ?

Any Upside Left In The Jar?

The analyst mean price target is $88.08 and the stock is only a dollar away. Analysts are mostly bullish on the name, with more than half rating it a hold. It is only up 12% in 52 weeks, but it had a huge run before.

There will be comparisons to Kraft and Mondelez. Smucker's has a higher P/E than Mondelez' 13.43 and a smaller yield than Mondelez' 4.50%. Smucker's also competes directly with Mondelez on coffee, hot beverages, and juice drinks. Mondelez had pulled back 50% from the IPO price on October 1 of $42.54 and has more room to run.

Smucker's is an iconic American name. It even has a gingham design on the jelly jars and sponsors the Pillsbury Bake-Off. It's always on the Fortune list of Best Companies To Work For. It's an admirable company. But I wouldn't buy it right here. Even for a name like Smucker's, earnings will have to be more than good, they'll have to be great.

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