Looking Beyond J.M. Smucker’s Short-Term Pain

J. M. Smucker (NYSE: SJM  ) manufactures food products and sells them throughout the world. This is similar to what other packaged- and processed-food companies like ConAgra Foods (NYSE: CAG  ) and Mondelez International  (NASDAQ: MDLZ  ) do. Let's take a look at how J. M. Smucker stacks up against its peers in the lucrative and volatile packaged- and processed-foods market.

Recent results
Smucker delivered another quarter of record earnings per share, which increased 13% year over year to $1.66. However, the catalyst for earnings growth was a lower share count, as consolidated revenue declined 6% year over year to approximately $1.5 billion. The revenue decline was due to a 6% decline in net price realization, primarily due to coffee and peanut butter. Smucker failed to match up to analysts' expectations on both top and bottom lines.

The miss on revenue and earnings during the third quarter was accompanied by a downward revision of the outlook. The company expects softness in the U.S. retail business to continue in the fourth quarter. In addition, it also faces headwinds of unfavorable currency movements. As a result, the company now expects full-year EPS to be in the range of $5.55 to $5.60 versus $5.72 to $5.82 earlier.

Looking forward
However, these are just short-term challenges and should not worry long-term investors, as Smucker has been able to cope with such setbacks in its long history of 117 years. With a focus on innovation, ongoing brand promotion, acquisitions, and share buybacks, Smucker is confident about long-term growth.

For example, in the current fiscal period, Smucker has achieved the target of introducing 100 new products, and it has a strong pipeline of innovative products for 2015. It is planning to introduce three new K-Cup varieties. It also plans to commence distribution of K-Cup offerings in new channels, including e-commerce channels. It is also aiming to expand the Smucker's brand into categories beyond fruit spreads to improve its presence in on-the-go snack options.

A crowded market
However, growth through acquisitions and innovation isn't just the forte of Smucker. For example, ConAgra's top-line growth in its previous quarter was on the back of acquisitions. Its acquisition of Ralcorp Holdings vaulted it to the top of the North American private-label food market.

Private-label brands are a huge market, as retailers are pushing both their private-label and store brands. These products offer 10% to 15% higher margins than national brands. Moreover, according to Nielsen data, around 46% of consumers prefer private-label brands when food prices rise. So, the Ralcorp acquisition presents a huge opportunity for ConAgra. The company has reiterated its view of $300 million in synergies for fiscal 2017. This acquisition will add $0.25 to earnings per share in fiscal 2014, as per the company.

On the other hand, Mondelez's fourth quarter was worse than the third quarter, but its revenue decline was a minuscule 0.1% year over year as compared to a 6% drop at Smucker. But even Mondelez missed analysts' expectations on both the top and bottom lines. This was primarily due to a slowdown in the emerging markets. Mondelez's first year as a global snacks company turned out to be disappointing, according to management.

During the latter half of fiscal 2013, Mondelez faced weak biscuit sales in China along with headwinds from coffee pricing and slower global category growth. Moreover, CEO Irene Rosenfeld admitted that Mondelez's margins were lower than its peers. In order to grow its operating margin from 12% in fiscal 2013 to 14%-16% by 2016, it has hired consultant firm Accenture for the implementation of a zero-based budgeting system.

In addition, the restructuring and reinventing of its supply chain will also be a long-term growth driver. All of these initiatives are expected to yield $3 billion in gross productivity savings, $1.5 billion in net savings, and $1 billion in incremental cash over the next three years.

Final Foolish thoughts
Smucker didn't perform very well in the latest quarter, but there are solid strategies in place for the long run. The company is adding more products to its portfolio, and the foray into K-Cups should help it capture the growing single-serve market. Moreover, J.M. Smucker is relatively cheap, with a trailing P/E of 18 and dividend yield of 2.4% adding to its attractiveness. Thus, Smucker investors should look beyond the weakness in the recent quarter, as the company's long-term prospects look good.

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