Sometimes we all need to reach for the comfort of a peanut butter and jelly sandwich. Enter The J.M. Smucker Co. (SJM), whose consumable products can be found in 90% of U.S. homes, states Doug Gerlach, editor of Investor Advisory Service.
Founded in 1897 with its headquarters in Ohio, Smucker sells a variety of packaged goods, with sales split about equally into retail packaged foods, homebrew coffees, and pet treats. Its 40+ brands include some of the most recognizable names in every one of its categories.
In packaged foods, it sells Smucker’s jams as well as Jif peanut butter. Coffee offerings include Folgers and Dunkin’, which it sells under a license from Dunkin’ Brands which runs through 2039.
In pet treats, it sells Milk-Bone, Meow Mix, and Kibbles ‘n Bits. treats segment should benefit apace. We note that the pandemic has led to an increase in pet ownership, estimated to be mid-single digits. The pet treats segment should benefit apace.
Wherever Smucker plays, it plays big. 70% of sales come from categories where it is the #1 or #2 competitor. By our standards, this is a very defensive company to feature.
Smucker offers less potential growth than we normally look for, but the market seems to be serving up better, or at least more, value opportunities compared to growth opportunities right now.
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For investors concerned about inflation, one reason to like Smucker in this environment is that the company should be able to pass along any cost pressures it encounters. If there is significant upside to our growth estimate, it probably comes from inflation.
Yes, this is a defensive pick, but its defense against inflation should be sound. A potential economic downturn should not hurt the company. Debt is reasonable at $5.3 billion, about 2.7 x EBITDA.
Free cash flow is consistently solid. It was a robust $1.3 billion over the trailing four quarters, almost 50% higher than reported net income. That level of positive cash accrual is not sustainable, but we highlight the difference as a signal of good earnings quality.
The upside is not spectacular, but an investment in Smucker should deliver a consistent and satisfying result. We model 7% compound growth, with a P/E range of 15.1 to 20. Our forecast low price is $93, a 20% decline from the current price.
Our high price is $192, the product of a 20 multiple on potential earnings per share of $9.59. The upside/downside ratio is 3.3 to 1. With dividends, our projected compound annual return is 11%.
