J.M. Smucker (SJM 1.69%) recently missed second quarter expectations with adjusted earnings per share of $1.52 on $1.56 billion in revenue. This compares to the analyst consensus estimate for adjusted EPS of $1.60 on revenue of $1.61 billion. This miss, along with lowering the fiscal year 2014 revenue projection to down 2% from down 1%, led to the stock selling off. Many investors tend to overreact to short-term news. This often presents opportunities for savvier investors.
J.M. Smucker has been around since 1897, surviving two world wars, the Great Depression, stagflation of the 1970s, Black Friday in 1987, the 2000 broad market crash known as the .com bubble, and the more recent financial crisis. Therefore, if you're looking at the big picture, it's highly unlikely that one quarterly miss means that J.M. Smucker has become a loser. However, we'll take a look at the current situation. We'll also see if more often-traded and talked about food companies such as ConAgra Foods (CAG 2.38%) or Mondelez International (MDLZ 0.15%) are likely to present better long-term investment opportunities.
Declining sales
J.M. Smucker suffered a 4% decline in sales in the second quarter year over year. However, this wasn't due to volume declines. The problem was pricing pressure. With a tepid consumer and fierce competition, J.M. Smucker has to lower prices in order to keep demand high. Sales were also negatively affected due to the planned exit from the international, foodservice, and natural foods segment.
The pricing pressure mentioned above might continue to negatively impact sales, but J.M. Smucker has been consistent on the bottom line. If you erase Wall Street expectations from the equation, the second quarter was good on the bottom line, with EPS increasing 5% excluding special projects. This was partially thanks to stock buybacks, which reduce the share count, but share buybacks do count. Considering that J.M. Smucker has generated $761 million in operating cash flow over the past year, while also sporting a healthy debt-to-equity ratio of 0.41, shareholder rewards should continue without a hitch. J.M. Smucker yields 2.10%.
Looking ahead, J.M. Smucker is confident that it will meet its EPS guidance for the year. Translation: J.M. Smucker will either meet or exceed its bottom-line expectation of non-GAAP income per diluted share of $57.2-$5.82 (excluding special project costs).
J.M. Smucker is seeing solid volume in many categories, and it's seeing lower commodity costs. Demand remains strong for its brands, such as Folgers, Dunkin' Donuts Packaged Coffee, Jif, and Smuckers. As long as demand is high, management can capitalize. The game plan is to rely on innovation, high quality, and top-notch marketing for a broad variety of brands.
According to anonymous employee reviews on Glassdoor.com, recent acquisitions of Cumberland and Enray have led to overstaffing and understaffing in some areas, which will take time to work out. (Overall, employees point to an excellent working environment.)
J.M. Smucker should look appealing to long-term investors, but maybe the Supermarket Guru will lead you in another direction.
Supermarket Guru
This title belongs to Phil Lempert, who analyzes trends in food marketing. This isn't just any analyst. He makes regular appearances on NBC News' Today Show, and ABC's The View. Most importantly for investors, he works closely with ConAgra Foods, often pointing out consumer trends and how ConAgra Foods meets those trends with its innovative products. That's a nice ally for ConAgra Foods.
According to Phil Lempert, consumers currently desire convenient, health-satisfying foods. He recently predicted shopping trends expected for 2014, and in his Top 10 List, he often ends with a plug for ConAgra Foods brands – a marketing angle for ConAgra Foods that gives its brands more exposure to consumers. These brands include Snack Pack, Slim Jim, Reddi-Wip, Peter Pan, PAM, Orville Redenbacher's, Banquet, Chef Boyarde, Egg Beaters, Healthy Choice, Hebrew National, Hunt's, and Marie Callender's.
Do you have any of those brands in your home right now? I'm going to guess "yes." I'm confident in that guess given that ConAgra Foods has 99% household penetration throughout the United States. That's often going to lead to quality results and confident investors.
The ConAgra Foods situation is unique because it recently paid $4.5 billion for Ralcorp (private-label food producer.) This integration will take time to perfect, and Ralcorp is now leveraged with a debt-to-equity ratio of 1.77. It will take time for ConAgra to pay off its debts in order to maximize its potential. ConAgra currently yields 3%. It will be interesting to see if that's sustainable over the next few years.
Would you prefer Oreo cookies and belVita biscuits?
European demand
You won't often find "European" and "demand" in the same sentence, but for Mondelez International, Europe has been a hot spot. Since 2009, revenue for its Oreo brand has skyrocketed 25% in Europe. During the same time frame, revenue jumped 18% for its belVita brand throughout Europe.
Logically, Mondelez International is spending more than $100 million on a new European biscuit factory to meet rising demand. The company has spent $240 million on biscuit manufacturing since 2011. Don't worry; these moves are affordable. Mondelez International generated $2.95 billion in operating cash flow over the past year, and it sports a respectable debt-to-equity ratio of 0.61. Mondelez International yields 1.70%, which is likely to remain intact.
Mondelez International delivered $35 billion in revenue in 2012. It sells its products in 165 countries, and it's the global leader in chocolate, gum, candy, biscuits, coffee, and powdered beverages.
And the winner is....
Conclusion
All three companies are likely to be long-term winners. However, ConAgra Foods is still working its way through its Ralcorp acquisition and associated debt. Mondelez International is a market-share leader in several categories. That fact alone should lead to long-term shareholder rewards. J.M. Smucker has fought off a multitude of headwinds for more than a century. A little pricing pressure isn't going to turn a winner into a loser. J.M. Smucker will always find a way. It should also be comforting to know that J.M Smucker consistently delivers large profits.
