Can Smucker Create a More Positive Spread?

Leading brands are great. Selling products that people need to buy over and over again is just as good. Failing to earn back the cost of your capital? That's not so good. But that's the tug of war going on at JM Smucker (NYSE: SJM  ) right now.

Results for this food company's first fiscal quarter were neither terrible nor particularly encouraging to this Fool. Revenue crept up about 3%, but margins were down across the board and adjusted operating income fell about 3% (adjusted, that is, for restructuring and merger-related expenses). It should be noted, though, that the decision to sell the company's Canadian grain business did have some negative impact on performance, though not enough in my view to really reverse the basics of the story.

Once again, the company appears to have failed to earn back its cost of capital. For all the chatter about P/Es and such, this is the financial valuation metric that really matters. Think of it like this -- you can invest $100 in one of two businesses; one of them will earn $15 on that $100, and the other will earn $5. Assuming all other things are equal, which company do you want to support? Now, that's an extremely oversimplified way to look at economic profits and returns on capital, but I think it conveys the basic point: Folks who can't do much with capital don't deserve more of it.

To be fair, Smucker is not really a "steady-state" company yet. Well-known products like Jif and Crisco are fairly new additions to the mix, and the company is looking for ways to improve margins and returns (like the sale of the relatively low-margin grain business). At the same time, though, companies like Unilever (NYSE: UN  ) , Kraft (NYSE: KFT  ) , ConAgra (NYSE: CAG  ) , and so on have their own shareholder obligations to grow and improve, so it's not as if Smucker has an easy path ahead.

With other options out there that are both cheaper and better (at least in terms of generating true economic returns), it's hard for me to get excited about Smucker. Fools who feel they have special insight into how Smucker can/will improve may want to take a look, but long-term appreciation will be limited by just how well management can improve its internal use of its own capital base.

For more Foolish food for thought:

Kraft and Unilever areMotley Fool Income Investorselections. Take the newsletter for a 30-day free trial.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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