J.M. Smucker: A Stable Business That Deserves Attention, Hold For Now

seekingalpha11-19

SJM is a stable, low-growth business that has been expanding market share, and growing revenue, earnings, and dividends consistently over the decades.This dividend aristocrat is offering an attractive...

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Smucker: A Stable Business That Deserves Attention, Hold For Now","media":"seekingalpha","content":"<div>\n<p>SJM is a stable, low-growth business that has been expanding market share, and growing revenue, earnings, and dividends consistently over the decades.This dividend aristocrat is offering an attractive...</p>\n\n<a href=\"https://seekingalpha.com/article/4738517-jm-smucker-stock-stable-business-that-deserves-attention-hold-for-now\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>J.M. 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Smucker: A Stable Business That Deserves Attention, Hold For Now\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-19 09:55 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4738517-jm-smucker-stock-stable-business-that-deserves-attention-hold-for-now><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>SJM is a stable, low-growth business that has been expanding market share, and growing revenue, earnings, and dividends consistently over the decades.This dividend aristocrat is offering an attractive...</p>\n\n<a href=\"https://seekingalpha.com/article/4738517-jm-smucker-stock-stable-business-that-deserves-attention-hold-for-now\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4585","symbol_name":"ETF&股票定投概念","start_time":0,"source_url":"https://seekingalpha.com/article/4738517-jm-smucker-stock-stable-business-that-deserves-attention-hold-for-now","article_id":"2484796818","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/523513989/image_523513989.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2484796818","pubTimestamp":1731981319,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"SJM is a stable, low-growth business that has been expanding market share, and growing revenue, earnings, and dividends consistently over the decades.This dividend aristocrat is offering an attractive","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4585":"ETF&股票定投概念","BK4588":"碎股","BK4212":"包装食品与肉类","SJM":"斯马克"},"translate_title":"J.M.Smucker：值得关注的稳定业务，暂时持有","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SJM":0.9},"content_text":"SJM is a stable, low-growth business that has been expanding market share, and growing revenue, earnings, and dividends consistently over the decades.This dividend aristocrat is offering an attractive 4% dividend yield, which is far higher than the 2.01% offered by NOBL and the 2.38% by SDY.SJM has a narrow competitive moat from its diverse product range and experienced management.However, its high debt load will limit management's ability to grow value through share repurchases and new acquisitions.Factoring the near-and-mid-term headwinds with the high debt load, it will be prudent to wait for a better entry price with a wider margin of safety.   NoDerog Business Overview According to J.M. Smucker's (NYSE:SJM) 2024 10K, the company is mainly involved in \"the manufacturing and marketing of branded food and beverage products on a worldwide basis\". SJM claims that the branded food and beverage products it mainly sells in North America include \"a strong portfolio of trusted, iconic, market-leading brands\". The company reports its businesses in four segments: 1) U.S. Retail Coffee, 2) U.S. Retail Frozen Handheld and Spreads, 3) U.S. Retail Pet Foods, and 4) Sweet Baked Snacks, the latest addition after the acquisition of Hostess Brands in 2023. The following table provides a summary of the major brands carried by SJM: SJM 2024 10K page 3 These segments comprised 85% of consolidated net sales in 2024 and represent a major portion of SJM's strategic focus – the sale of branded food and beverage products with leadership positions to consumers through retail outlets in North America. According to the Barclays Global Consumers Staples Conference in September 2024, 95% of all U.S. retail sales come from categories where SJM holds the number 1 or 2 in brand position. 2024 Barclays Presentation slides What I Like About The Company SJM Has Been Around For A Long Time This is a 125-year-old packaged food business company. Although SJM is no longer a founder-led company, for investors who place value in the leadership driven by the same consistent vision, and for top management to have the relevant industry experience to ride through the troughs and peaks, it speaks volumes to have a Smucker continuing to head the business, so when an analyst from Stifel posed a question on coffee price increase during the conference call, CEO Mark Smucker responded with, \"We've been here before. First and foremost, obviously, it is a commodity. It can be volatile... We have multiple levers. We have the ability to actually flex formulas and still deliver the exact same consumer experience.\" In short, management knows what they are doing, and shareholders can trust them. SJM's Products Are Well-Received In Good Times And Bad Based on this article in 2018, SJM reported that at least one of their products could be found in 93% of all U.S. households. With the divestment of some brands, that figure has fallen slightly but SJM products can still be found in at least 90% of U.S. households. This speaks well to the inelastic demand for SJM's products. SJM Is On-track To Develop Several Billion-Dollar Brands In the CAGNY Presentation in February 2024, SJM was confident that it could grow the following brands to each bring in $1 billion in sales:  Uncrustables, by the end of FY 2026 Dunkin Coffee, in 5 years by FY 2029 K-Cup Pods, in 5 years by FY 2029 Milk Bone dog biscuits, in 2 years by FY 2026  What amazed me the most is how SJM revitalized Milk Bone, a 100-plus-year-old brand, premiumize and repositioned it as a billion-dollar revenue machine in just two more years. This gives me confidence that management can do the same for other brands that could be lagging in growth now. SJM Is A Growing Business Speaking of growth, J.M. Smucker is not a growth machine like Nvidia (NVDA) with huge \"secular tailwinds\" as analysts like to tout. Neither is J.M. Smucker a value trap. In the past 15 years, the company has expanded its footprint, taken market share, and grown revenue, net income, and earnings per share. It has rewarded patient shareholders with consistent dividend payout that tripled since 2009. Fast Graph SJM May Outperform The S&P 500 - Again Referring to the previous table, SJM was profitable every year, even during bear markets. In the six years after the Great Financial Crisis, SJM even outperformed the S&P 500. It was likely that post-GFC, investors sought the safety and stability of a company like J.M. Smucker. Fast Graph I am not saying that a bear market is imminent in the short term, nor am I saying that SJM can outperform S&P 500 again. I cherry-picked the period above to show SJM's outperformance. The reality is that S&P trounced SJM and its peer group hands down in 3-year, 5-year, and 10-year periods, which is to be expected. SJM FY 2024 Investor Day Slide 74 SJM is a slow-growth business unlike many of the constituents in the S&P 500, especially the Megacap 8 - big tech companies that make up a disproportionate percentage of the index, 30.6% as of 15 November 2024 to be specific. Investors have to acknowledge a valuation disparity between the S&P 500 as a whole and a company like SJM. Currently, on a price multiple basis, the S&P 500 at a 30 PE is overvalued compared to its median PE of 15. S&P 500 PE Ratio as of 15 November 2024 Rationalizing this high valuation is premised on companies growing their forward earnings. If earnings can continue to grow, the high earnings multiple now is justified as that will come down to more reasonable figures. However, if the earnings or revenue growth of any one of the Megacap 8 or more were to disappoint, the backlash would affect the index disproportionately too. Cracks are already appearing in the bullish thesis. Bloomberg If forward earnings and revenue were to fall and valuation contracts severely, it would be another bear market again. In that scenario, it is easy to see why investors may flock to companies like SJM, just like what they did in the past. Firstly, SJM's valuation is much more palatable. At a P/E of 15.2, SJM is trading below its 5-year, 10-year, and 20-year average price multiple. But more on valuation later. Seeking Alpha Valuation Page Investorsgrow Secondly, the experienced management team at J.M. Smucker has been providing good revenue and earnings guidance. SJM has consistently either met or beaten both 1-year and 2-year revenue forecasts, and the accuracy of its 1-year and 2-year earnings forecasts are reliable too. All these point to the credibility of analysts' forecasts regarding SJM. Fast Graph Now, analysts believe that SJM can continue to grow adjusted operating earnings at an average rate of 5.23%. With this growth and multiple expansion, a simple reversion to the mean (blended P/E of around 14) translates to a 20.28% CAGR by 2027, a remarkable result that can handily beat the S&P 500 - if that were to happen. Fast Graph It's not too shabby an investment for a peanut butter and jam company. SJM Is A Dividend Aristocrat And even if the above scenario does not pan out, an investment in SJM can still be worthwhile for income investors aiming to get a steady, dependable income that grows annually to beat inflation, one that has the potential to provide a 10% total shareholder return. 2024 Barclays Global Consumer Staples Conference In the 2024 Barclays Global Consumer Staples Conference, SJM management presents their long-term objective to grow shareholder return, through increasing sales, improving operating efficiencies, growing adjusted operating income, share repurchases, and paying growing dividends. SJM has been a dependable dividend payer, paying a growing dividend for 26 years. 2024 Barclays Global Consumer Staples Conference SJM has been a prudent capital allocator, keeping the dividend payout ratio under 45% of adjusted earnings while growing. What I Dislike About The Company Short-to-Mid-Term (Probably) Headwinds It is always worrisome when management adjusts guidance down after just one quarter. SJM FY 2025 Q1 Presentation Slides Multiple issues are causing concerns, such as the potential of weight loss drugs to reduce sales, a weaker consumer environment leading to reduced spending in the more discretionary aspects of SJM's portfolio, a weakened channel in the convenience category, and higher green coffee prices reducing gross margins. Increased Debt Level May Lower Total Shareholder Returns SJM has been acquiring companies to expand its portfolio of brands in the packaged goods category. This acquisitive strategy is normal for SJM but it is also expensive. As of April 2024, SJM has long-term and current debt obligations of $7.85 billion. SJM 2024 10K page 40 I am not a fan of companies saddling themselves with a huge debt load. At first glance, this debt level is manageable. For the next 5 years from 2025 to 2029, the total long-term and current debt obligations come to $2.25 billion, with only $1 billion due in 2025, and $0 in 2026 and 2027 respectively. Staggering debt repayment over many years will surely make it manageable. However, management may have to go through some financial balancing act to achieve its long-term goal of giving shareholders 10+% total returns. Management plans to pay down $500 million of debt in FY 2024, and another $500 million in FY 2025 and FY 2026 respectively (2024 Barclays Presentation Slide 34). I presume this $1.5 billion amount excludes interest payments of $379.4 million in 2025 and $664.3 million from 2026 to 2027. Based on the presentation slides from the Barclays Global Consumer Staples Conference in September 2024, management expects to make $875 million in free cash flow in FY 2025. Deducting $500 million for debt repayment in FY 2025 leaves $375 million of FCF. With 106 million shares outstanding, and if the dividend per share for FY 2025 comes to $4.30, $455.8 million is required. That is a shortfall of $80 million. SJM has $40 million in cash, which is insufficient, and I have not touched on interest repayments yet. SJM is a BBB-rated company with a long history of profitability selling products in regular demand, so I am sure it can pay off these debts. However, as a potential investor, I cannot help but be concerned if management can achieve the 10% total shareholder returns. I suspect SJM may have to utilize every tool it has to prioritize paying down debt and maintaining its dividend payout over share repurchases or making new acquisitions, so achieving high-single-digit earnings per share growth may be challenging in FY 2025 and 2026. Morningstar analyst Kristoffer Inton agrees with this assessment in his September 2024 note on SJM. Intense Competition Chipping Away At Its Narrow Moat I disagree with Morningstar's analyst Kristoffer Inton that SJM does not have a moat. SJM sells a wide range of branded products up and down the value chain to capture growth in different demographics. With meaningful and targeted advertisements to boost its brand and grow market share, SJM should be able to command a narrow moat. However, I acknowledge that there is much competition in every category in which SJM operates. Take for example its most profitable segment, the U.S. Retail Coffee. That represents 33% of the company's sales in the United States and the profit is the highest at 28% of its retail coffee sales. SJM 2024 10K page 67 This segment faces competition from major brands like Starbucks and private label brands. SJM 2024 10K page 5 It is not uncommon for companies like SJM to compete with their customers. While 33% of SJM's 2024 sales were to Walmart (WMT) and its subsidiaries, Walmart competes with SJM's coffee offerings with its private-label coffee. Valuation In an earlier segment, I wrote about SJM's valuation as attractive on a price-earnings multiple basis and how \"a simple reversion to the mean (blended P/E of around 14) translates to a 20.28% CAGR by 2027.\" That perspective does not account for debt and cash on hand. After doing so, my valuation of SJM comes in at $82.24. Analysts' Intrinsic Value Estimate Morningstar analyst disagrees and believes that SJM is valued at around $128. The consensus price target by 13 Wall Street analysts is $123.15, suggesting that SJM is undervalued at $106.92 with a 15% upside. Tradingview Yet, if SJM is truly undervalued with a double-digit margin of safety, why would the majority of the 20 analysts assign a \"HOLD\", with one \"Sell\", one \"Strong Sell\", and only four analysts saying SJM is a \"Strong Buy\"? Tradingview Why do I see the \"smart money folks\" getting out of their positions in SJM? The table below shows the top 20 funds that held the most SJM shares have completely sold their position. Morningstar Most of the top 20 institutions that held the most SJM shares have also completely sold their position. Morningstar Conclusion J.M. Smucker is a stable, low-growth business that has been expanding market share, and growing revenue, earnings, and dividends consistently over the decades. This dividend aristocrat is offering an attractive 4% dividend yield, which is far higher than the 2.01% offered by the S&P 500 Dividend Aristocrats ETF (NOBL) and the 2.38% by the S&P Dividend ETF (SDY). Its payout ratio of around 45% is safe and allows SJM to continue growing the dividend safely at low to mid-single-digits for years. Based on certain value metrics like P/E and P/B, SJM is trading below its historical average and should be undervalued, and I can see reasons for initiating a BUY. If SJM can continue to grow in the mid-single-digit and experience multiple expansion, it is possible to see a 20% CAGR by 2027. However, when factoring in the challenging economic environment that SJM operates in and how its increased debt level would impact its growth, it is clear that SJM has to prioritize paying down debt and successfully integrating the latest Hostess acquisition, so it is difficult to see SJM adding to shareholder value through share repurchases or making another major acquisition anytime soon. Despite the many reasons for liking SJM, based on my risk appetite, the high debt is a deal-breaker for me, so for now, I would reluctantly put SJM on \"HOLD\", meaning I will wait for a better entry point with a wider margin of safety before I consider initiating a position.  As Howard Marks always reminds his listeners, Investment success doesn’t come from 'buying good things,' but rather from 'buying things well.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484796818"}