The J.M. Smucker Company Stock Analysis – Welcome to My FFJ Portfolio

Summary

• This The J.M. Smucker stock analysis is based on Q4 and FY2017 results released June 8, 2017 and its 2018 forecast.
• I have been looking to increase my exposure in the Consumer sector and view the Non-Cyclical Consumer Goods space as one likely to experience a lower level of volatility.
• SJM has been on my radar but I have viewed the stock as overpriced. The price has retraced to a level where I now view SJM as fairly priced.
• It has been in business for 120 years, has several iconic brands in its portfolio, and meets my criteria for a company in which I want to invest for the long-term.
• SJM generates strong free cash flow which will enable management to deleverage while making astute “bolt-on” acquisitions thus resulting in strong stock price appreciation over the long-term.

Introduction

When structuring my portfolio, I endeavor to spread my money over the 5 main sectors: Finance, Utilities, Manufacturing, Resources, and Consumer. Given my concern there is the strong probability of a market correction within the next 12 months, I am looking to initiate or increase exposure to companies within the Non-Cyclical Consumer Goods space as such companies are likely to experience less volatility.

In this regard, I have used the iSHARES Global Consumer Staples ETF Schedule of Investments found within the 2017 iSHARES Annual Report to Shareholders as my database.

NOTE: I have elected to focus exclusively on Canadian and US companies to avoid “usury” withholding taxes that accompany American Deposit Receipts.

This brings us to the subject of this post, The J. M. Smucker Company (NYSE: SJM), which is a member of this ETF. I consume its products and it has been on my list of companies to analyze but I have viewed it as too expensive until recently. Now that it has pulled back from its August 2016 high of ~$157 and it has released its FY 2017 results and 2018 forecast on June 8, 2017, I thought it would be an opportune time to determine whether SJM would be a suitable fit for the FFJ Portfolio.

Based on my analysis, organic growth has been a challenge. Strategic acquisitions and various cost management strategies, however, have enabled SJM to reward investors much better than many of its counterparts within the iSHARES Global Consumer Staples ETF.

SJM Overview

SJM is a ~$15B market cap manufacturer and marketer of branded food and beverage products and pet food and pet snacks in North America. The Company's segments include U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods, and International and Foodservice.

SJM’s net sales by reportable segment are as follows:

SJM is the 8th largest shelf-stable food and beverage manufacturer in the center of the grocery store and at least one of its products can be found in 93% of all U.S. households.

SJM’s iconic brands can be found here.

In addition to these existing iconic brands, SJM entered into a definitive agreement with ConAgra (NYSE: CAG) at the end of May 2017 to acquire the Wesson® Oil Brand; this brand of edible oils has been trusted by consumers for over 100 years.  The “bolt-on” acquisition is an all-cash transaction which will be funded primarily with debt. Details of the terms of the acquisition and the anticipated benefits can be found here.

Readers are strongly encouraged to review SJM’s 100 page presentation made at the February 22, 2017 Consumer Analyst Group of New York (CAGNY) conference. This presentation provides a comprehensive overview of SJM’s business.

While it has some great brand names, organic growth is a challenge, especially in the highly competitive pet-food business. This is clearly evident when you review the Q4 2017 Earnings Press release.

SJM plans to succeed in this challenging environment through:

• a balance between cost management and investments
• using its iconic brands
• capitalizing on significant opportunities with smaller brands
• the strategic use of ecommerce opportunities
• a balance in the deployment of cash

FY2017 Financial Results and 2018 Forecast

On June 8, 2017, SJM released its Q4 2017 and FY2017 results and provided its 2018 forecast. The Press Release can be found here and here.

SJM has significantly increased its debt levels in recent years (~$5B as at FYE2017 on April 30, 2017 of which ~$0.5B is due within the year) to fund multiple acquisitions (revenue has grown from ~$2.1B in FY 2007 to ~$7.4B in FY 2017).

Moody’s currently rates SJM’s senior unsecured debt Baa2 (long-term rating) which is deemed to be a lower medium grade. Its commercial paper is rated P-2 (short-term rating) which straddles lower and upper medium grade.

On February 22, 2017, SJM presented at the Consumer Analyst Group of New York (CAGNY) conference. While management indicated an update on SJM’s capital structure and cash deployment would be provided later in FY2018, it stressed that debt repayment is one of SJM’s priorities. Is also provided some indication as to how it intended to deploy some of its cash in fiscal 2018 (finance $0.31B in CAPEX and repay $0.5B senior note maturity).

Various projects are underway which should generate roughly $0.45B in cost reductions by the end of fiscal 2020.

Readers should note that SJM generates strong free cash flow (2013 through 2017 amounted to $0.649B, $0.577B, $0.486B, $1.257B, and $0.867B and $0.775B is forecast for FY2018).

After having been in business for ~120 years and having made multiple acquisitions, I am not surprised to see~$6B in Goodwill and ~$6B in Other Intangible Assets. Some readers may be concerned about the magnitude of these figures. If SJM had a history of making acquisitions and subsequently recording huge impairment charges, I would also be concerned. That, however, does not appear to be the case.

As for the amortization of goodwill, this does not impact free cash flow which I view as being the company’s lifeblood.

Dividend

SJM’s dividend distribution history can be found here. On June 1, 2017, SJM distributed its 4^th consecutive quarterly $0.75 dividend.

I suspect SJM’s Board of Directors will likely approve a dividend increase within the first couple of weeks of July. I certainly do not expect a $0.08/quarter increase as was done in 2016 so I will use a conservative $0.03/quarter increase for my dividend yield analysis. At $0.78/quarter, or $3.12/year, that would give me a dividend yield of ~2.44% based on my purchase price of $127.52.

I recognize this dividend yield is on the thin side for some readers. I, however, am not a yield chaser and am more concerned with the company’s overall potential return. In this regard, I have calculated SJM’s dividend compound annual growth rate (CAGR) as follows:

The CAGR amounts to ~9.3% but I have decided to err on the side of caution in trying to determine what kind of return I could expect in 10 years’ time. I have, therefore, used an annual dividend growth rate of 8.5%.

I have also decided to err on the side of caution as it pertains to SJM’s stock price annual growth rate. Over a 10 year timeframe, SJM’s stock price grew ~123%.

I suspect this growth rate will be difficult to replicate over the next 10 years. I have, therefore, created two scenarios and have arbitrarily selected a stock price annual growth rate of 4.25% and 5%. Inputting these metrics into a dividend reinvestment calculator, I get the following results. Note: I will be automatically reinvesting all dividends.

The projected annual return in both scenarios generates a return I deem acceptable.

Valuation

The current mean FY2018 adjusted EPS estimates from various brokers for fiscal 2018 is $7.93. Management’s adjusted EPS outlook for FY2018 is $7.85 - $8.05.

I have acquired 200 SJM shares @ $127.52. Using this purchase price and an adjusted EPS of $7.85, I get a forward PE of 16.25. This level is acceptable from my perspective.

In my opinion, SJM’s long operating history, growth potential, dividend growth streak, and strong brands in the non-cyclical consumer goods space suggest it will be a safe long-term investment for someone with my risk averse investment profile.

If SJM can continue to make strategic acquisitions at fair values and shift into newer consumer segments that work out as planned, I think SJM should be able to outperform analyst targets of ~5% earnings growth over the next 5 years.

The J.M. Smucker Company Stock Analysis - Final Thoughts

Despite my recently outlined rationale for sitting on the sidelines and the turbulence I think we may witness in the US stock market given recent events, I acquired SJM shares on June 9th for the FFJ Portfolio and have no intention of “trading” this investment for at least another 14 – 15 years.

I view $127.52 as an acceptable entry point based on where I think SJM will be several years in the future.

Note: I sincerely appreciate the time you took to read this post. As always, please leave any feedback and questions you may have in the “Contact Me Here” section to the right.

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: At the time of writing this post I am long SJM.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.