Will Java Keep This Pantry Powerhouse Jolting Higher?

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Some stocks like J.M. Smucker (NYSE: SJM) and Home Depot keep ratcheting higher with no end in sight. Is it possible that every man, woman, and child in America is pounding down coffee or pounding nails? J.M. Smucker is up 32% over the last year.

Four days of constant rain made me realize why Starbucks started in Seattle and why J.M. Smucker became a pantry powerhouse soon after it bought Folger's coffee from Procter & Gamble for $3 billion in 2008. Since its dip during the 2009 recession and time to close the deal its stock is up 92%. America runs on coffee and J.M. Smucker knows it.

<img alt="" src="http://media.ycharts.com/charts/c78b1deb61b14c56ab6cdd5012aca1e9.png" />

SJM data by YCharts

J.M. Smucker had made many strategic acquisitions but none that boosted the company's stock more. Coffee is the biggest revenue driver for J.M. Smucker. 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... virtually a coffee for coffee aficionados of every stripe.

For most of the period between 1995 and 2005 the stock barely moved. The family-founded and family-run company nestled at One Strawberry Lane in Orrville, OH might have just as well been the setting for a latter day Our Town revival. But  this fourth generation of family management had 21st century ideas of expansion beyond their jams and jellies in the iconic gingham patterned jars. Delicious strawberry jam, by the way.

The company was buying smaller companies from 1963 until 2008 making up the majority of its new brand portfolio with purchases of juices, Crisco, Pillsbury, Jif peanut butter, (obviously a marriage made in heaven for a jelly company), Carnation, and many more pantry products. But it was Folger's that really changed the company's fortunes.

Since then its major purchases have been coffee related with the 2011 acquisition of Sara Lee's North American coffee and tea foodservice operations and coffee brands Millstone Coffee and Rowland Roasters in 2010.

Despite analysts continually raising expectations J.M. Smucker has managed to consistently surprise. The company reported fourth quarter earnings on June 6 meeting on revenue but beating on earnings, a 31% improvement on GAAP EPS of $1.22. Operating, gross, and net margins all expanded. Free cash flow increased 40% for 2013 to $649 million.

Still, revenues were a little soft and analysts worried about J.M. Smucker's slowing growth for its K-cup coffee business, although the company said it is still bullish on K-Cups and will debut two varieties this year. A most interesting nugget from the call was that sales of specialty coffee brands Cafe Bustelo and Pilon, aimed at the Hispanic market and those who like a stronger brew, were up in the mid-teens while Folgers' sales were only up 3%. Folgers was named the Coffee Brand of the Year by the 2013 Harris Poll.

CEO Richard Smucker noted that 70 new products had been introduced, mentioning in particular the Jif Hazelnut brand, similar to the very popular Nutella. One hundred more new products are planned for 2014. Also he boasted the five year CAGR for sales was 18% and earnings were 11%, far above their own anticipated 6% and 8%.

J.M. Smucker currently trades at a trailing 20 P/E and offers a 2.10% yield. Dividends have been  increased annually, usually announced in the summer.  Last year it was increased 9% and the company also bought back 4% of shares.

Juicing java profits

Mondelez International (NASDAQ: MDLZ) is its biggest competitor with five times the market cap at $53 billion. It also has a lower PEG of 1.59 to J.M. Smucker's 2.22. The yield at Mondelez is lower, at only 1.70% and the payout ratio is 54%. Its trailing P/E is 19.15.

Mondelez is the second largest global coffee producer and this is where it really goes head to head with J.M. Smucker. It has its own Tassimo coffee machine challenging both Nestle's Nespresso and the Keurig.

Coffee (and other beverages) makes up 17% of Mondelez sales and on June 10 it announced it will begin selling its own coffee pods for the Nestle Nespresso machine, rolling it our first in Western Europe. The company added that despite economic weakness in Europe, Greece and Spain have been big adopters of the Tassimo and coffee pods in general.

Mondelez spun Kraft Foods  off last fall and has a lower yield than the new Kraft Foods Group (NASDAQ: KRFT), the domestic food giant. Mondelez kept most of the snacks: Cadbury's, Oreo, Nabisco, LU biscuits, and Jacobs coffee. It also kept former Kraft CEO Irene Rosenfeld.

J.M. Smucker is also competing with the new Kraft Foods as well, as it kept Maxwell House, the biggest coffee brand competing with Folgers. Kraft Foods is J.M. Smucker's most direct competitor, competing on peanut butter, Lunchables vs. Uncrustables, juices, and baking products. Kraft Foods also owns coffees Gevalia Kaffe and Yuban as well as flavored Maxwell House International.

Kraft Foods Group has a high 3.70% yield (at a 59% payout ratio) but also has the lowest growth with a PEG of 3.21. This was expected since the spinoff that Kraft (no relation) would keep domestic brands and offer  yield to attract  value investors. Mondelez has the jolt of international and emerging market growth and faster growing snack brands for the mo-mo investor.

Of the three J.M. Smucker has the highest operating margin at 16.47% to Kraft's 16.14% and Mondelez' 11.76%. Comparing apples to apples is challenging with these three as the product mixes aren't identical  but with the lowest dividend payout ratio at 42% J.M. Smucker would be the winner. (Trivia: J.M. Smucker started selling apple butter in 1897.)

All three should benefit from lower coffee bean costs and Kraft and J.M. Smucker from lower peanut costs as well. However Kraft Foods Group is highly exposed to meat and commodity costs.

The final gulp

J.M. Smucker is well positioned to benefit from America's favorite sandwich, the PB&J as well as a global java addiction. J.M. Smucker can continue its stock's ascendancy with reliable dividend increases to attract value buyers and new products for growth investors. The company guided higher on the call and basically said all systems go for java.


AnnaLisa Kraft 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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