Would Warren Buffett Buy This Stock?

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

The greatest players in any profession often make their job look effortless. Whether it was Michael Jordan on the court, George Carlin weaving political satire, or Warren Buffett's prophetic visions of the economy, the genius of what they do comes in the mastery of fundamentals.

As the CEO of Berkshire Hathaway, Buffett's investing strategy is well known. Buy understandable businesses with solid value and assured growth at great prices. Then let the top notch managers continue on their way. Over the last 20 years this strategy has led to a 1000% increase in Berkshire's stock price.

Warren has a soft spot for food companies. Berkshire has interests in Nestle, See's Candies, Dairy Queen, Mars, and most recently acquired shares of Heinz. These are just a few of the yummy names held but I noticed one exceptional company is missing.

Who: A Sweet Treat

J.M. Smucker (NYSE: SJM) is a packaged food company based primarily in the USA and Canada. Its products include coffee, peanut butter, fruit spreads, shortening, oils, baking mixes, and many other goods.

Management: The Smucker Brothers

The stock is up over 400% since the Smucker brothers, Richard and Timothy, took the helm as co-CEO's back in 2001. It has also been a consistent dividend payer (and raiser) since 1960.

The long term strategy is outlined by Chief Operating Officer, Vince Byrd. “Combining strong brand building, innovation, and productivity initiatives with an ability to quickly adapt to market conditions has created a platform for growth.” 

This continues a decade long tradition of quality management coupled with long term focus. A strategy that has led Smucker to recently acquire names like Rowland Coffee and Sara Lee.

Value: A gem in a potentially overvalued sector

Recently I published an article entitled "It Might Be Time to Take Profits in Blue Chip Dividend Payers." This focused on consumer staple stocks and why I believe companies like Campbell Soup, General Mills, and Hershey are overvalued. But, while doing research for that article I found Smucker to have very attractive valuations that haven't been distorted by the move from bonds to blue chip dividend payers.

A few brief highlights are a Price Earnings (PE) ratio of 20 and a very attractive forward PE of 16.45. With the industry average PE of 23.40 this stock is both undervalued in current terms and will experience appreciation over the next year as stock price aligns to earnings in order to maintain an approximate 20 PE. The price to book is 2.11 vs an industry average of 4.48. Finally, the long term debt/equity is an ultra low 0.38 vs an industry average of 1.03.

Recent Results: A tasty quarter

The most recent quarterly results for Smucker showed impressive gains in margins, gross profits, and increasing sales in key brands such as Dunkin' Donuts packaged coffee, which was up 29%. Operating income increased 5% year over year. Net income increased 13% over that same time. If you included the company's share repurchase program the diluted net income increased a whopping 17%. Margins benefited from a drop in commodity prices and administrative expenses, even with the increase in marketing to promote brand awareness.

Growth: Rising Dough

While a history of quality management and great performance is not a guarantee of the future, it certainly doesn't hurt. Smucker seems to have a firm handle on what it takes to run a company dedicated to the distant future and not just the next quarter.

Analysts are predicting a 10% earnings increase for the coming year. But Smucker has continually surprised to the upside with 3 out of the last 4 quarters beating the consensus, and the 4th coming in line. It also appears that analysts are playing catch-up lately with 13 upward earnings revisions for 2013 in the last 30 days alone.

Competition: Tough Cookies

Smucker's main competition would be Hershey (NYSE: HSY) for the confectionery segment and General Mills (NYSE: GIS) for the packaged, baking, and related items.

<table> <tbody> <tr> <td>Valuation</td> <td>Smucker</td> <td>Hershey</td> <td>General Mills</td> </tr> <tr> <td>P/E</td> <td>20</td> <td>29</td> <td> 18.30</td> </tr> <tr> <td>Forward P/E</td> <td>16.45</td> <td> 22.23</td> <td> 17.04</td> </tr> <tr> <td>Price/Book</td> <td>2.11</td> <td>18.22</td> <td> 4.59</td> </tr> <tr> <td>Price/Sales</td> <td>1.89</td> <td>2.97</td> <td> 1.85</td> </tr> <tr> <td>Long Term Debt/Equity</td> <td>0.38</td> <td>1.40</td> <td> 0.95</td> </tr> <tr> <td>Average Five Year Sales Growth Rate</td> <td>16.83%</td> <td>6.02%</td> <td> 4.56%</td> </tr> </tbody> </table>

A quick look at the table above shows that Smucker is the most attractive value play with the lowest Price/Book, Long Term Debt/Equity, and a near tie for Price/Sales. Smucker was the clear outperformer in terms of sales over the last five years is also projected to have the lowest Forward P/E.

Conclusion: Yummy

So back to the original question. Would Warren Buffett want to own Smucker?

When you consider the inelastic nature of the business, longevity, quality family management, and similar business strategies focused on the long term, I would find it likely that Warren Buffett has at least considered J.M. Smucker in the past and may be doing so currently. In my estimation that not only makes this company a potential buy out target (a long shot), but also a solid play for the long term value investor.


James Catlin 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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