Finding a Way to Play an American Classic

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There are a few things that are American classics: baseball, apple pie, and peanut butter and jelly.  The latter has been a staple item in kids’ lunchboxes for decades.  Despite rising concerns over allergic conditions, peanut butter continues to be a popular, cheap source of protein for a wide swath of Americans.  Since most people don’t want to own a peanut farm, the best way to invest in peanut spreads is through a consumer goods marketer.  So, which companies are poised for gains?

J.M. Smucker (NYSE: SJM)

Smucker has been delivering solid results for investors lately, as it has built solid product franchises outside of its core jelly spread business.  Its acquisition of the JIF brand from Procter & Gamble in 2001 vaulted the company into a national leadership position in the peanut butter category.  Smucker has also been diversifying into the wholesale coffee business, including its purchase of Sara Lee’s foodservice unit in 2012.

In the first nine months of FY2013, Smucker has continued its business momentum, with increases in revenues and adjusted operating income of 9.3% and 9.7%, respectively, versus the prior-year period.  The company’s sales growth benefited volume gains in both its JIF and Smucker spread businesses, as well as acquisition-fueled gains in its foodservice segment.  In addition, Smucker has maintained its profit margin by passing commodity cost inflation to its customers through price increases.

Looking ahead, Smucker’s strong product portfolio has given it the leverage to maintain and increase its shelf space at the nation’s grocers.  It’s strong operating cash flow and limited use of debt also provides the funds for waging the marketing war for supremacy in the peanut butter category.  In hindsight, Smucker’s acquisition of the JIF brand was a shrewd, value-enhancing move.

ConAgra Foods (NYSE: CAG)

Similar to Smucker, ConAgra Foods has been transforming itself into a packaged food juggernaut and delivering solid gains to investors.  The company has been a serial acquirer over the past decade that has added leading product brands, including Swiss Miss chocolate mixes, Orville Redenbacher’s popcorn, and Peter Pan peanut spreads.  However, ConAgra Foods has used a healthy mix of debt, with a current funded debt load of roughly $11 billion, which adds some risk to its investment profile.

In the first nine months of FY2013, ConAgra has generated solid financial results, with increases in revenues and adjusted operating income of 9.7% and 8.0%, respectively, compared to the prior-year period.  While organic sales volumes showed limited growth company-wide, ConAgra had some pockets of strength, including rising volumes in its peanut spread category.  Like Smucker, ConAgra was also able to maintain its strong profit margin by selectively passing along rising commodity costs to customers.

Looking ahead, ConAgra continues to diversify away from its flour milling roots, with a recent decision to contribute its milling operations to a joint venture that will align the company with competitor Cargill.  The move should allow management to further focus on its growing dominance in the private label food business, which was the rationale behind its recent acquisition of packaged food giant Ralcorp.  ConAgra also needs to start paying down its debt, so that is will have greater flexibility for future strategic moves.

Boulder Brands (NASDAQ: BDBD)

While not a household name, Boulder Brands has a solid position in the peanut spread category with its Smart Balance and Earth balance brand names.  The company is also igniting sales momentum through a focus on the organic segment, including recent acquisitions of gluton-free pioneers Glutino and Udi’s.  With less marketing power than its competitors, Boulder Brands has been riding the population’s increased health consciousness to greater shelf space at the nation’s grocers, with retailers adding over 600 individual products in 2012.

In its latest fiscal year, Boulder Brands delivered strong overall sales growth, as its natural segment generated high, double-digit comparable sales gains.  The company’s sales gains have been a function of product diversification efforts, including new products in the frozen food, dessert, and snacks areas.  However, its peanut spread segment reported weak results, as customers opted for lower-priced competitor products.  With its well-known Smart Balance brand name, though, Boulder Brands is likely to remain a key competitor in the peanut spread space, especially among the health-conscious customer cohort.

The bottom line

Success in the peanut butter category requires significant scale and resources in order to be able to reach customers at an appealing price point.  With that metric in mind, Smucker and ConAgra are currently at the head of the class and belong on investors’ watchlists.

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Robert Hanley owns shares of Boulder Brands. 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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