Wake Up to J.M. Smucker Ahead of Quarterly Earnings

Shares of J.D. Smucker are up more than 12% in 2015 -- but there's room for more growth.
By Richard Saintvilus ,

J.M. Smucker (SJM) - Get Report will report fiscal second quarter earnings before the opening bell Thursday. Known for various packaged food products, including its Folger's coffee brand, Smucker has found ways to consistently increase its profit margins, allowing it to make more money even amid periods of low revenue. Revenue climbed almost 50% in its fiscal first quarter, owing to its February acquisition of Big Heart Pet Brands.

SJM shares are up more than 12% so far in 2015, crushing both the Dow Jones Industrial Average (DJI) and the S&P 500 (SPX) index. If that's not impressive enough, consider the past three and five years, during which these shares have climbed some 31% and 80%, respectively. And that's even with the strong U.S. dollar devaluing its overseas sales.

All told, it's time to appreciate how well the Orrville, Ohio-based company has performed in a packaged food industry that have been hurt by both weak sales and slumping profit margins. And while the sector appears to be on the rebound, valuation concerns have crept in for Smucker. With its shares trading at 33 times earnings, against a P/E of 21 for the S&P 500 index, new investors may want to know where's the value -- especially with SJM stock nearing an all-time high of $113.

The company's earnings are projected to accelerate in the years ahead, owing not only to having absorbed Big Heart Pet Brands, but also its partnership with Dunkin' Brands (DNKN) - Get Report , which now allows Smucker to produce Dunkin'-branded K-Cup coffee pods to retail consumers.

In its fiscal first quarter, sales in Smucker's coffee segment surged more than 12% year-over-year, reaching $565 million. This is a huge improvement over the 1% year-over-year decline in the coffee segment yielded in the fourth quarter. The coffee business accounts for over 40% of Smucker's first-quarter revenue (excluding contributions from Big Heart Pet Brands).

Now that coffee sales have gotten a much-needed jolt, thanks to Dunkin' Brands, Smucker can focus on extracting value from Big Heart Pet Brands by realizing operational synergies -- particularly in areas like sales, marketing and production. With fiscal 2017 estimates of $6.40 a share, suggesting 11% year-over-year earnings growth above 2016 estimates of $5.75, it would seem the market expects better results in the quarters ahead.

Even with SJM stock trading near all-time highs, an investment today can still be profitable in the next 12 to 18 months, given its average analyst 12-month price target of $125.50.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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