Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Jam maker J.M. Smucker (NYSE:SJM) saw its shares fall after the company reported a big earnings miss yesterday. Today, analysts are adding to Smucker investors' pain with a series of price target cuts. In a one-two-three punch, analysts at Deutsche Bank, Citigroup, and Stephens all cut their targets on Smucker stock, as reported this morning on StreetInsider.com (subscription required).
That's the bad news. Now here's the good: Investors are shaking off Wall Street's negative sentiment, ignoring the price target cuts, and bidding Smucker stock up today after Thursday's sell-off. Is that the right move?
Let's find out.
What happened yesterday
We'll start with a quick review of yesterday's news. Thursday morning, Smucker wrapped up its fiscal 2018 with a report announcing earnings of $1.64 per share on sales of $1.78 billion in the fourth quarter, falling short of Wall Street's estimates. The company earned $11.78 per share on $7.4 billion in sales for the full year, with free cash flow up marginally year over year at $896 million.
Additionally, Smucker released guidance for the coming 2019 fiscal year. Adjusted profits should run between $8.40 and $8.65 per share on sales of $8.3 billion -- up 13% from fiscal 2018 sales. Free cash flow, however, is expected to decline by at least 5%, and perhaps as much as 10% -- $800 million to $850 million for the year.
How Wall Street reacted to that
Stephens noted that Smucker missed Q4 earnings expectations and called its fiscal 2019 guidance "weaker than expected," and cut its price target by 15% to $110 a share.
Deutsche Bank pointed to Smucker's apparent need to increase spending on ads in 2019 in order to goose sales as its "base business continues to remain under pressure amid a competitive environment and challenging retailer dynamics," and cut its price target on Smucker stock to $97 per share.
Really, only Citigroup put any sort of a positive spin on the results. On the one hand, Citi sees Smucker spending about $85 million more on marketing this year than last, while cutting its other costs less, and paying a higher tax rate -- all negatives in Citi's book. On the other hand, though, Citi points out that "SJM's stock was already washed out with [a P/E] valuation near its 15 year low" before earnings came out. Yet the company is growing, with "organic revenues" expected to be up "by +2%," "gross margins" look steady, and net profits should grow at least some this year.
All of this, says Citi, "suggests SJM is moving in a positive direction. We see the stock's valuation as near a bottom, but with positive growth ahead and exciting new brands launching (1850, Jif Power-ups)." Accordingly, although Citi cut its price target to $127 this morning, it reiterated its buy rating.
The future for J.M. Smucker stock investors
Judging from how investors are treating Smucker stock today, it appears most folks are taking Citigroup's positive sentiments to heart and dismissing the concerns raised by Stephens and Deutsche. Is that the right call?
Here's how I look at it. Right now, with $896 million in trailing free cash flow, Smucker stock sells for about 12.8 times FCF without counting its debt, or 18 times with debt (i.e., valued on enterprise value rather than just market cap). Looking past fiscal 2019's probably down year, most analysts surveyed by S&P Global Market Intelligence still see Smucker growing its profits at about 14.2% annually over the next five years -- a prediction Smucker itself seems to agree with, given its expectation for 13% sales growth this year.
Add in a 3.1% dividend yield, and I get a total return of about 17.3% on the stock, which isn't too far off from the stock's EV/FCF valuation of 18. Thus, while Smucker stock isn't exactly cheap just yet, it's on its way there, and still worth keeping under consideration. In fact, were Smucker shares to get even cheaper than they are today, or were management to make more progress whittling down its debt (so as to lower the enterprise value), I'd even say the stock is approaching a price at which investors should consider it a buy.