NEW YORK ( TheStreet) -- Since reporting a 4% revenue decline in its fiscal second-quarter, shares of J.M. Smucker ( SJM) have remained under pressure. I won't pretend that it was an exceptional quarter. But it certainly wasn't the disaster the Street made it out to be.
At the time, the results in hand from Kellogg (K), Kraft Foods (KRFT) and Nestle (NSRGY) weren't that impressive on a relative basis. But the Street gave these companies standing ovations. Smucker, meanwhile, saw its stock plummet 8%, just when I thought analysts had finally gotten more realistic about growth expectations for the packaged food industry.
All told, I thought Smucker was a bargain then. And with shares down 10% from their October high of $112.92, I like Smucker even more today, especially given management's recent focus on profitability. In that regard, I don't believe the company, which is relatively small when compared to Kraft and General Mills (GIS), has received the respect it deserves for its historically strong margins.
The company reports fiscal third-quarter results Friday. Management will have an opportunity to regain the Street's confidence. Investors want to see that despite the recent weakness in volume, Smucker has a strong portfolio of brands and runs a business that can thrive in any environment.
The Street will be looking for earnings of $1.68 per share on revenue of $1.53 billion, which would represent a 2% year-over-year revenue decline. On the other hand, profits are expected to jump 14% year over year. Given the maturity of this company and its 2.5% dividend yield, I believe the profits should be the true measure of the company's performance.
That's not to say revenue growth doesn't matter. In that regard, no one seems to notice that Smucker has actually posted better-than-expected volume in both the U.S. and internationally.
Analysts should find it even more impressive that the company can maintain such strong profitability amid struggles to move product, especially while rivals that are said to have performed better on revenue aren't able to reward investors with profits. That's where it counts.
As for earnings, the Street will be understandably focused on that as well. Now, while I do factor operating performances more than I do revenue, this is one case where being fixated too much on one number would be a mistake. As I've said, consensus estimates calls for $1.68 per share. Although I expect Smucker to meet or exceed that number, a 1-cent or 2-cent miss wouldn't be the end of the world, either.
With competition heating up from the likes of Mondelez (MDLZ) and Nestle, it would not surprise me to see sales and marketing expenses come in higher than expected. And this may nick the earnings-per-share number. Investors should also take into consideration any noticeable improvement on a GAAP basis. In that case, a "miss" may actually be a "gain," especially if the miss served to grow business in the U.S. and abroad.
If there's a question mark with Smucker at the moment, it's with the recent weakness in K-cup revenue. With the popularity of single-serve coffee from (among others) Starbucks (SBUX) and Green Mountain Coffee (GMCR), it's disappointing that Smucker saw a meaningful decline in the fiscal second quarter in its Millstone K-Cup sales. That and the price declines for peanut butter makes things a little less clear about the company's outlook for 2014.
Management did compensate for this by posting strong comps in many other categories, including Folgers Coffee and Crisco Oil. Having said all of that, it comes down to the extent management can affirm volume/price recovery in the business. What this means is that the stock will take the direction of the guidance.
Given the company's strong profits and dividend, these shares should be purchased ahead of earnings and bought even if earnings disappoint. With shares of ConAgra Foods (CAG) and Mondelez trading at a premium to Smucker while lacking the operating margin, Smucker's relative fair value suggests a share price of $102 in the 6 to 12 months.
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.