The J.M. Smucker Company's Bread Spread Issues

J.M. Smucker delivered a weak earnings report, as it faces increasing competition in its core segments from rivals Hormel Foods and ConAgra.

Feb 23, 2014 at 8:00AM

It is a joyful day indeed when an analyst can write about some of his favorite topics, in this case peanut butter and jam. One of America's largest processed food companies, J.M. Smucker (NYSE:SJM), delivered a rather disappointing earnings report recently, sending the stock down toward the end of last week. Apparently, the company is suffering from increased competition in several of its bread-and-butter businesses, including offerings from ConAgra (NYSE:CAG) and Hormel Foods (NYSE:HRL).

That raises the question. What are Smucker's prospects going forward?

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Pricing pressure
Smucker reported third-quarter earnings that came in below analyst expectations. For the quarter, net revenue was down 6% to $1.47 billion, which was well below the $1.53 billion consensus estimate. Earnings per share came in at $1.66, which was up from last year, largely as a result of a diminished number of shares, but missed estimates by $0.02. Additionally, the company lowered its full-year forecast.

By segment, the results were as follows. Smucker's biggest business by revenue, coffee, was down 8% due to a 6% year-over-year price decline. Still, volume was looking a little better than last year. The U.S. foods segment declined by about 4%, largely due to lower selling prices. On the other hand, prices for raw goods such as peanuts and oils are expected to fall a bit this year, resulting in higher margins.

Peanut butter battle
According to management, the company is dealing with a very competitive environment in its core segments. At the moment, prime competitors in the peanut butter market are ConAgra's Skippy and Hormel's Peter Pan, which currently enjoy a cost advantage, although this is expected to even out by 2015.

Perhaps more worrying for the industry is the shift in consumer behavior toward buying healthier, less processed foods. ConAgra seems to be getting hurt, having recently lowered its 2014 guidance to a range of $2.22 to $2.25 from a previous $2.34 to $2.38. Part of the problem was a decline in volume at the company's consumer foods segment, although a delay in the segment's restructuring also caused problems.

Hormel Foods seems to be doing a little better, but as its biggest business is meat products, it's tougher to compare. Fourth-quarter sales increased 7%, with the acquisition of the Skippy brand earning a 23.3% sales increase for its grocery-products segment. Encouragingly, earnings before interest and taxes were up some 19.4%, reaching nearly $240 million.

Valuations and metrics
Looking at trailing valuations, ConAgra and Smucker's are at roughly the same level, while Hormel Foods looks quite a bit more expensive at 23 times trailing earnings. ConAgra and J.M. Smucker trade around 17 times earnings.

In terms of book value, ConAgra is by far the cheapest, trading at only 0.7 book. However, the company has a heavy debt load; its total debt-to-equity ratio is in the stratosphere. Smucker looks like a better bet, with a lower debt load, a higher operating margin, and a reasonable price-to-sales of 1.72.

The bottom line
Smucker, the owner of America's iconic Jif brand of peanut butter, recently came out with some disappointing numbers. Pricing pressure and increased competition from rivals ConAgra and Hormel Foods are eating into its margins. But it's currently paying more for peanuts than the competition, so management expects business to improve in the near future.

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