Packaged foods producer J.M. Smucker (NYSE: SJM ) , which sells well-known brands such as Jif, Crisco, and Folgers, piled shareholders' plates high with good news in its recent results for Q1 of fiscal year 2010. Investors who expect similar servings in the future, however, may feel a hint of indigestion.
Please sir, may I have some more?
Leading off the quarterly numbers, the November 2008 acquisition of Folgers from consumer-staples colossus Procter & Gamble (NYSE: PG ) helped power a 58% increase in net sales and a prodigious 132% leap in net income. Earnings per share, meanwhile, increased a modest 8% on acquisition-related costs and higher share count. Stripping out the merger, integration, and restructuring expenses, EPS climbed by 12%.
But the Smucker portfolio performed enviably, even without waking up to Folgers' largesse. Impressive volume, profit, and net margin gains in most business segments yielded one of the best quarters I've seen from a packaged-foods company this calendar year.
Hungry for proof? Net volume (excluding the 9% gain by Folgers) grew 2%, about in line with or beating the recent quarterly numbers posted by pantry heavyweights Kraft (NYSE: KFT ) , ConAgra (NYSE: CAG ) , and General Mills (NYSE: GIS ) .
The U.S./North American retail market has been no picnic for consumer staples lately. Volumes have even been negative at Heinz (NYSE: HNZ ) and Kellogg (NYSE: K ) . Conversely, Smucker's U.S. Retail segment, which includes peanut butter, fruit spread, and pancake products, seems outright juiced by the recession, with quarterly volume up 7%. That beats Kellogg's and General Mills' U.S./North American retail growth, and it's tomato sauce on the face of Heinz, whose North American Consumer Products business saw a stomach-turning volume slide.
My compliments to the chef
So exactly how much of this outperformance owes to J.M. Smucker's business savvy?
On volumes, I credit management for constructing a highly resilient brand portfolio, which now boasts key marketing synergies made possible by the Folgers name. In addition, on the strength of its brands and retailer relationships, Smucker has been able to grow distribution.
That said, the gross margin gain -- 38.6% versus the year-ago 31.3% -- resulted largely from circumstance, not design. The Folgers business was almost singularly responsible for that expansion, and unusually high coffee margins, which benefited in part from lower input costs, are probably not sustainable. In other words, future quarters could see a softer bottom line.
Moreover, management explained its confidence in its fiscal 2010 guidance by citing a return to historical margin levels, thanks primarily to lower commodity costs across business segments. That's great, but it's no guarantee of a fat bottom line, should the commodity gods turn fickle.
A mere two months ago, I suggested that investors could brew up some gains with Smucker stock. Shares have appreciated roughly 13% since then, but with a fiscal 2010 P/E of 15 or so -- and an amply competitive forward P/E of 13.0 -- the market clearly hasn't assigned the company a premium valuation. Whether or not it keeps outperforming, the stock looks poised to maintain a valuation in line with its peers.
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