Smucker's Stock Is Sweeter Than Its Earnings Miss Indicates

NEW YORK (TheStreet) -- Weak sales of its Folgers coffee brand continue to pressure the profits of fruit-spread specialist J.M. Smucker (SJM), which just missed Wall Street's fourth-quarter earnings expectations.

But with shares down more almost 7% just in the past week, SJM stock has become too cheap to ignore.

Why? For one thing, despite weak sales volumes and lower margins that have impacted the entire packaged food space, the sector appears to be on the rebound, gaining almost 7% on the year to date and more than 16% in the past 12 months. With much of the negativity regarding downbeat consumer spending already priced in, value investors can do well with SJM shares.

Granted, consumers are changing their eating habits and that means packaged-food companies like the Orrville, Ohio-based Smucker must rethink the ingredients in their products as well how to market to more health-conscious shoppers. And then there's the matter of how to price the product.

None of this is new. What's more important to consider is how Smucker plans to navigate this trough and deliver value to long-term shareholders.

While fourth-quarter adjusted profits of 98 cents per share were 1 cent shy of Street estimates, Smucker offered several reasons to be optimistic about its future. Better pricing stabilized its profit margins, for instance, and Smucker fourth-quarter revenue rose 17% year over year.

Revenue of $1.44 billion beat average estimates by about $100 million, despite a 1% year-over-year decline in U.S. retail coffee sales. Smucker, which has a large global operation, delivered a 6% year-over-year increase in its international food service business, helping to offset 8% decline in U.S. consumer foods.

Even with shares, which closed at $111.57, up nearly 11% on the year, SJM stock at 20 times earnings can offer decent value. The stock's average analyst 12-month price target of $122 implies better than 10% gains from current levels.

If SJM does reach its average earnings estimate of $6.39 for fiscal year 2016, this means investors are only paying 17 times forward earnings for a company that is growing its profit margins and is actively buying back its stock. With Smucker projected to grow long-term earnings at an annual rate of 8% for the next five years, SJM investors can expect more gains in the months and quarters ahead.

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

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