These days, women are becoming more and more career-oriented, and the ratio of women leaving home for work is increasing day by day. This has lead to an increase in the demand for packaged food items due to their ease of usage and reduced preparation time for time-constrained consumers. In addition, the gradual economic recovery we're experiencing will raise the demand for natural food items as the disposable income of consumers increases. Foreseeing this trend, many companies in the industry are opting for acquisitions as a shortcut to achieving quicker growth.
Recently, J. M. Smucker (NYSE: SJM ) took over Enray in order to extend its natural foods product range in the U.S. In the following article, I will examine the implications of this acquisition, and I will also comment on the current status of JM's competitors, Campbell Soup (NYSE: CPB ) and ConAgra Foods (NYSE: CAG ) .
The expected synergies from the acquisition of Enray
The acquisition of Enray widens the existing natural foods product range offered by Smucker, and further strengthens its market position in the natural and organic beverages market. This combination is strategically compelling, as the privately-held company makes organic, gluten free ancient grain products, including pastas and cookies, which are mainly sold under its brand truRoots. Enray's products will complement the products supplied by Smucker's, which includes fruit spreads, packaged coffee, peanut butter, ice cream toppings, condensed milk and natural foods.
The addition of Enray will provide Smucker with an excellent opportunity to take part in the gluten-free food category, which is expected to have great future prospects. Smuckers also looks forward to utilizing its established infrastructure to spread the reach of Enray's truRoots brand, in order to increase its sales revenue.
Enray has generated $45 million in sales in the last twelve months. Staying conservative and assuming the sales figure will only increase by the current U.S. inflation rate and U.S. GDP growth rate of 1.96% and 1.7%, respectively, Enray will add a minimum of $46.66 million to the top line of Smucker in the next twelve months. Applying the net margin (ttm) of 9.2%, this acquisition is projected to add $4.29 million, or $0.04 per share, to the company's earnings in the coming twelve months.
The market position of rivals
Campbell, a key player in the packaged food industry, has recently made two acquisitions. The company acquired the Kelson Group to enhance its international foothold and to capture a larger chunk of the baked snacks growth potential in China. Kelson is the market leader of sweet cookies in China, where its sales have grown at a CAGR of 28% in the last three years. The acquisition has added a well established brand, Kjeldsens, to Campbell's balance sheet. Campbell's marketing and supply chain expertise will help Kelson's high quality snacks expand its reach in existing and new markets.
Campbell also took over the market leader of organic baby food, Plum Organics, in June 2013. The company looks forward to devoting its resources to this premium-priced organic food category in order to enhance the Plum brand's market presence.
ConAgra is another company operating in this industry. The company acquired Ralcorp Holdings, one of the largest packaged food companies in North America, in the beginning of FY 2013. The synergies resulting from this takeover are expected to fully materialize by the end of FY 2017. On comparable grounds, the diluted EPS is expected to be $2.40, up from $1.85 in FY 2014. The double-digit growth in the consumer foods segment, along with the substantial earnings contribution from Ralcorp, were the drivers of this 30% increase in earnings. The company is also looking forward to realizing pre-tax cost synergies of $300 million by 2017.
In the midst of the current market dynamics, Smucker has taken the right step by acquiring Enray to widen its product portfolio. The company's forward P/E is projected to be 15.7 times, compared to the industry average of 19.2 times. This indicates a return potential of 22.29% in this undervalued stock. The company is also expected to raise its dividend yield to 2.15%, from 1.99%, in 2013.
The recent acquisitions by Campbell ensure a bright future for the company. Although the company's leverage level is quite high, with its debt to equity currently reported at 2.2x, compared to the industry average of 1x, it is efficiently utilizing the funds to generate an exorbitantly higher ROE (ttm) of 57.4% in an industry where 21.6% is the normal ROE level. The company also provides a regular income stream to its shareholders and is expected to raise its dividend yield to 2.55%, from 1.28%, in 2013.
As per the statistics released by the management of ConAgra, the company's diluted EPS will grow at a minimum of 10% during FY 2015-17. However, keeping in view the industry average ROE of 21.6%, the company's current ROE (ttm) of 16% and the future earnings increase is an insufficient return for investors who can rather invest in Campbell.