A Member of Pat McKeough’s Inner Circle recently asked for his advice on J.M. Smucker, a food maker company best known for jams, jellies and peanut butter.
Pat likes the power of the company’s multiple high-profile brands and the pricing power they offer. However, he notes one-third of the firm’s revenues come from Walmart. This makes it dependent on good relations with the notoriously hard-bargaining retailer.
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J.M. Smucker Co. (Symbol SJM on New York; www.jmsmucker.com), is the largest maker of jams, jellies and peanut butter in the U.S. Its top brands include Smucker’s and Jif. It also makes pet food and many other consumer products. The company has over 30 offices and manufacturing facilities across North America.
The U.S. accounts for about 87% of Smucker’s total sales. In addition, Walmart is its largest customer, representing about 34% of its sales.
Acquisitions have helped Smucker expand in the past few years, particularly into faster-growing businesses like pet foods. The company’s pet food business now generates 36% of total sales, while coffee products contribute 32%, and consumer products provide 19%. The remainder of the sales were from the International and Away From Home segments.
Key acquisitions include the March 2015 purchase of Big Heart Pet Brands for $6.0 billion. That business makes a variety of well-known pet foods, including Milk-Bone (dog treats), Kibbles ‘n Bits (dog food) and Meow Mix (cat foods).
In May 2018, Smucker acquired Ainsworth Pet Nutrition, which makes premium pet food and snacks under the Rachael Ray Nutrish brand. It paid $1.7 billion for Ainsworth.
As well, in January 2021, the company completed the sale of its Natural Balance premium pet food business to Nexus Capital Management LP for $50 million in cash. The sale helps Smucker focus on its core pet food brands, including Rachael Ray Nutrish, Milk-Bone and Meow Mix.
Inner Circle: Higher selling prices help boost revenues but earnings are less solid for J.M. Smucker
Smucker’s sales and profits have been up and down over the last few years. Sales rose 6.5% between 2018 (fiscal years end April 30) and 2019, from $7.36 billion in 2018 to $7.84 billion in 2019. That rise was driven by the addition of Ainsworth.
Sales then fell to $7.80 billion in 2020. However, sales rose 1% that year, excluding acquisitions, divestitures, and foreign currency exchange effects. Sales then climbed 2.6% in 2021, to $8.00 billion. Sales were then flat, in the year ended April 30, 2022, at $8.00 billion. In fiscal 2023, sales improved 6.6% to $8.53 billion.
If you exclude costs to integrate new businesses and other unusual items, Smucker’s earnings rose 4.2%, from $904.6 million ($7.96 a share) in fiscal 2018 to $942.7 million ($8.29 a share) in 2019. Earnings rose again in 2020, up 6.0% to $999.1 million ($8.76 a share). They increased 2.6% in 2021, to $1.03 billion ($9.12 a share). Then, despite flat sales, earnings fell in the year ended April 30, 2022, by 6.5% to $962.2 million ($8.88 a share). The decline was mostly due to higher costs. Earnings in fiscal 2023 fell another 1.2% to $950.8 million ($8.92 a share).
The company’s long-term debt of $4.3 billion is a moderate 28% of its market cap. Due to its significant acquisitions, goodwill and intangible assets now total $9.65 billion, or a high 63% of the company’s market cap. However, Smucker owns some of the U.S.’s best-known food brands, so a major writedown seems unlikely.
Smucker pays a quarterly dividend of $1.06 a share. The annual rate of $4.24 yields 2.8%.
The stock has a couple of long-term drawbacks. First, jams, jellies and other sugar-based snacks and ingredients face rising criticism over health concerns. Second, retail giant Walmart is Smucker’s biggest customer, supplying around one third of its sales. This leaves Smucker at risk if demand weakens for its sugar-based goods and Walmart decides to bargain more aggressively on pricing.
Recommendation in Pat’s Inner Circle: J.M. Smucker Co. is a hold.
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