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Investors Should Pucker Up to Smucker

NEW YORK ( TheStreet) -- With earnings results in hand from the likes of Kellogg (K - Get Report), Kraft Foods (KRFT) and Nestle (NSRGY), I had begun to think that analysts had finally developed more realistic expectations about the packaged food industry, given the applause these companies have received for results that were (at best) decent where compared to historical norms. But that sentiment didn't last.

In disappointing fashion, the Street's irrationality resumed following J.M. Smucker (SJM - Get Report) 8% stock decline, which I can describe only as an overreaction to the company's fiscal second-quarter results. Although the stock has since recovered some of those losses, I believe the fact that shares are still off 7% from their October high of $112.92 presents an opportunity for investors looking for sweet gains.

Plus, given management's focus on profitability and running a business with several market-leading brands, on a long-term basis, Smucker stock, which is cheap when compared to ConAgra (CAG) and Mondelez (MDLZ), is poised to outperform in 2014. And to say nothing about the noticeable volume/price recovery the entire packaged food industry has already begun to enjoy.

Now to be completely honest, I've been regrettably indifferent about this company for most of the year. This is even though Smucker, which runs a relatively small business compared to Kraft and General Mills (GIS), has outperformed its larger rivals in several metrics, including gross margin and operating margin.

My issue, though, has been that the stock was already very popular. It wasn't going to sneak up on anyone. Accordingly, the Street has had no problem rewarding Smucker for its above-average performances. And given that the sector as a whole was struggling to move product, while profiting very little on what it was able to move, I felt Smucker's popularity was well deserved.

I'm saying this even though I was unimpressed with the company's revenue results for the June quarter. Not to mention the downbeat guidance issued by management. But that, too, plays a role in why I believe the Street's negative reaction to the most recent results was undeserved. Analysts knew that these numbers were coming, yet still seemed surprised.

I'm not suggesting it was an incredible quarter -- not with revenue falling 4% year over year. Even so, the company more than offset this weakness with continued improvements in volume in many of its categories, like Folgers Coffee, Crisco Oil, Jif Peanut Butter and so on. Equally impressive was that Smucker's continues to post gains in the U.S. where competition and unpredictable economic conditions have impacted the industry's margins.

To that end, from an operational perspective, although Smucker did disappoint the Street by missing earnings-per-share estimates of $1.60, this needs to be said in the context of its 7% year-over-year improvement in GAAP earnings. And the idea that good profitable companies should be punished for "missing estimates" that they never issued in the first place is another flaw in these types of assessments.

That's not to say the company is flawless, though. There are still some risks here. But to the extent that the quarter's 4% revenue decline implies immediate market share loss, I don't believe that to be the case. I will agree that business has softened quite a bit. But that's also the case for Mondelez, Kraft and General Mills. And Smucker's better-than-expected volume both in the U.S. and internationally should refute the Street's anxiety about competitive pressures.

All told, this was not the sort of quarter management will hang its hat on. But it was also far from a disaster. I believe Smucker will continue to operate a sound business that will thrive in any environment, given its portfolio of strong household brands. And the Street's "corrective action" only made an attractive company that is growing profitability even more appetizing.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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KRFT $0.00 0.00%
NSRGY $73.89 -0.53%
K $67.86 -1.00%
SJM $122.09 -0.37%
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