Under the Radar: Smucker Offers Sweet Deal

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American icon John Chapman, a.k.a. "Johnny Appleseed," meandered around Ohio in the early 1800s, sowing apple seeds and starting nurseries. Not long after, Jerome Monroe Smucker opened a cider mill in Orrville, Ohio, capitalizing on the fruits of Chapman's labor.

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From cider came apple butter and from apple butter came jams and jellies. Today, Smucker's family business leads the market in fruit spreads, ice cream toppings and natural peanut butter. But the company, J.M. Smucker ( SJM), has stayed true to its roots, keeping its headquarters at 1 Strawberry Lane in Orrville.

If the U.S. economic outlook dims, investors will turn to consumer-staples companies -- the makers of products that are always in demand. As the market rallies, it might be wise to add these defensive stocks to your portfolio in case the collective mood sours. Among the companies you should consider is Smucker, a mid-cap stock with brand power and a strong financial position.

Smucker shares, which we rate "buy," have delivered consistent gains. They have climbed 36% in the past year even as the S&P Consumer Staples Index lost 9.2%. The stock has jumped 30% annually, on average, in each of the past three years, outperforming the average 5.9% increase of the industry.

Net income at Smucker more than doubled in the fiscal fourth quarter to $94 million. Revenue climbed 81% to $1.06 billion. Earnings per share were up more modestly, by 19% to 80 cents.

Despite its impressive quarterly performance and financial position, Smucker shares are affordable. With a price-to-earnings ratio of 15, the stock is 10% cheaper than those of the average packaged-food and meat company, and offers a dividend yield of 2.86%.

Quarterly margins, which reflect the company's profitability, strengthened despite recessionary pressures. The operating margin climbed a remarkable 796 basis points to 10% and the net margin widened 255 basis points to 8.8%. But return on assets shed 219 basis points to 3.3% and return on equity fell 409 basis points to 5.4%.

Smucker has $456 million of cash and $1.5 billion of debt on its balance sheet. A quick ratio of 0.67 indicates a less-than-ideal liquidity position. Our model prefers companies with quick ratios higher than 1. Still, its cash balance has more than doubled since last year's fourth quarter and a debt-to-equity ratio of 0.31 indicates conservative leverage.

Smucker acquired Folgers in November, adding the bagged-coffee brands Folgers, Dunkin' Donuts and Milestone to its lineup. The new unit's revenue increased during the quarter as budget-conscious Americans started brewing their own coffee.

Americans might ban steak and cheese from their dinner tables when the economy shrinks, but peanut butter and jelly will still be fixtures in the fridge.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

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