Undervalued J.M. Smucker Company Has Multiple Expansion In-Play
J.M. Smucker Company’s (NYSE: SJM) Q2 results are not without issue but what issues there are can be overlooked in favor of pricing power. While inflationary issues are cutting into bottom-line results, the cut was less severe than expected and the company is expecting higher net pricing across a broad range of categories to offset the impact. In our view, the J.M. Smucker Company was one of the more-attractive consumer staples companies before the report due to its value and yield. Now it is more attractive than ever.
The J.M. Smucker Company Smashes The Consensus
The J.M. Smucker Company had a good quarter despite the rising threat of commodity pricing, freight, manufacturing, and packaging cost increases. The company reported $2.05 billion in revenue which is up 1.0% over last year and beat the consensus by 490 basis points. This includes the impact of divestitures as well. Including the sale of Crisco and Natural Balance sales from continuing operations are up 8.0%. On a segment basis, a -1.0% decline in Pets and a -8.0% decline in Consumer Foods was more than offset by an 8% increase in Coffee and a 4% increase in International/Food Away.
Moving down the report the company experienced a deep decline in the margin but less than expected and offset by revenue strength. The gross profit decreased by 13% due to rising costs but left the GAAP and adjusted earnings above consensus. The GAAP EPS of $1.90 beat by a nickel while the adjusted $2.43 beat by $0.38. In regards to growth, GAAAP earnings are down -6.0% from last year while the adjusted EPS is up 2%.
Looking forward, the company is expecting to increase prices and that, along with demand, will help drive growth above prior expectations. The company upped its guidance for revenue to flat or slightly higher from the previous down single digits with EPS in the range of $8.35 to $8.75. This compares to the prior guidance of $8.25 to $8.65 and the Marketbeat.com consensus of $8.41.
The Analysts Are Driving J.M. Smucker Higher
The analysts only rate J.M. Smucker Co. a Hold but we think that will change soon. There were at least 5 sell-siders out with commentary following the Q2 release and all of it bullish. While no analysts upped their rating, they all upped their price targets in response to the market action. The Marketbeat.com consensus price target is near $134 and assumes the stock is fairly valued at current levels. The high price target of $146, however, assumes more than 10% upside is available and that is not counting the dividend. The dividend is worth about 3% at current prices and the stock is still cheap relative to its peers. The higher-valued consumer staples are trading closer to 25X to 30X their earnings compared to only 19X for the J.M. Smucker Co.
The Technical Outlook: The J.M. Smucker Co. Melts Up
Price action in shares of The J.M. Smucker Co. melted down in later summer due to the inflationary outlook but are now melting higher. With the company enacting price increases and combating inflation successfully, it looks like price action will continue higher. There is some resistance at the $134 level but we think it will be overcome soon. If not price action may close the gap formed after the earnings release before it moves higher.
J. M. Smucker is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.
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