Food manufacturer J. M. Smucker
Representing 27% percent of net sales, by my estimates, in the recently completed quarter, it'd be hard to argue that Smucker's greatest strength isn't the Folgers brand. With cost-conscious consumers brewing at home in favor of paying up at Starbucks
However, it's noteworthy that quarterly sales gains excluding Folgers came largely on the back of price rather than volume increases. Cooking oils in particular lost share to private label. Also, margins will compress a bit in fiscal 2010 as the company ramps up ad spending on the Folgers brand.
Potential offsets include opportunities to further leverage the fast-growing Dunkin' Donuts retail coffee brand -- responsible for more than $200 million in annual sales -- and to profit from more consumers eating at home. Premium brands such as Knott's Berry Farm spreads should appeal to those who are trading in a meal at Darden Restaurants'
Smucker's long-term debt to capital stands at 14.1% -- low in absolute terms and also significantly less than that of peers. Unless the capital markets once again grind to a halt, the company should be able to raise funds for potential acquisitions. If such opportunities materialize, I would like to see management utilize fixed-rate debt via bond issuance rather than rely on variable-rate bank debt, of which the company already has $350 million.
Although I view Folgers as a company strength, it's also potentially the greatest threat. I see the recession's end as far off, and I also believe that consumers will carry a strong sense of value and caution into any recovery. But there will come a time when the prosperous once again grab their joe on the go, and that will be a challenge to Folgers sales. In addition, coffee is a historically volatile commodity. Price spikes would likely contract Smucker's margins, while sustained high prices in the commodity might mean price hikes at the shelf, and that brings on the possibility of a price war with Kraft's
Shares have had a big run in the past few months, gaining close to 8% last week alone. Trading at a current fiscal year P/E of 14 with a still-palatable 2.9% dividend yield, the stock isn't yet riding a caffeine high. For investors who can stomach the risk of Folgers turning in a decaf performance at some future date, there's still time to buy.
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