J.M. Smucker's Hidden Source Of Value

| About: J. M. (SJM)

This article is part of an ongoing series that highlights specific companies that are on sale. It helps me to document my thought processes when I add to my holdings or initiate new positions. Please provide your feedback in the comments section below.

J.M. Smucker (NYSE:SJM) is currently offering investors an opportunity to buy portions of the company at $98.50/share. The stock has been steadily declining for about six months since reaching it's 52 week high and may now provide a good entry point. Right now, SJM is about thirteen percent off the 52 week high, hit in August at about $113 per ownership interest. This few month pullback provides longterm investors with a good opportunity to initiate a position. Essentially, SJM has earned two whole quarters' worth of profit and repurchased six month's worth of shares, yet the price is quite a bit lower than it was before that happened.

J.M. Smucker has a business model that is simple and sustainable. It manufactures food products and sells them throughout the world. Consumers are familiar with many of their brands, including Folgers, Jif, Crisco, & Pillsbury. J.M. Smucker is also able to increase its revenue at a rate that keeps up with inflation, passing along the devastating effects of inflation on to the consumer, not the owners. According to the 2013 Annual Report, sales growth was up 7%, year over year. Earnings per diluted share rose over 23%. Additionally, SJM is investing for future growth.

Despite the growth, I believe that J.M. Smucker trades at a discount to it's true valuation. SJM currently trades at 18 times ttm earnings and under 16 times projected next year earnings. EPS is expected to grow over 8% next year and average about 9% for the next five years. SJM appears to be heading in the right direction as a company, and I am content to accumulate shares at this perceived discount.

Also, J.M. Smucker is a cannibal! SJM has been buying back it's own stock at a pace that affects the bottom line. Just one year ago, four short quarters, there were 109 million shares outstanding of SJM. Today, there are under just over 105 million diluted shares. In one year, J.M. Smucker has retired almost four percent of its outstanding share volume! In three years, the company has retired 12% of it's outstanding shares. The company has indicated on many occasions that returning cash to shareholders via share buybacks is an important goal for management. They are using their free cash flow to buy out other shareholders, which further adds to the gains of the remaining shareholders.

With J.M. Smucker buying so much of their outstanding shares, let's look at how that will affect earnings. Analysts are expecting a consensus EPS of $1.68 for the next quarterly earnings release, with the lowest estimate coming in at $1.62. For reference, SJM reported EPS of $1.47 for the same quarter last year. Clearly, the company is being recognized by analysts for their growth opportunities. Despite this, the stock price has been beaten down in recent months. Analysts also expect revenue to come in at $1.5 billion, which is less than both the previous quarter and the same quarter last year. I think that this is a huge under-estimate. Revenue grew 7% year over year, per the 2013 Annual Report. With their continued investment for future growth, I believe that revenue will come in much higher. It doesn't appear that analysts are expecting much, if anything, from J.M. Smucker's sales, and this most recent quarter was the holiday season. Also, with SJM's large share buyback activity, it wouldn't have to make more in total earnings to affect the bottom-line EPS. Even if profits stagnate, EPS will increase due to the share buyback. I believe that J.M. Smucker will have a positive surprise on both the top line and bottom line, and this is the catalyst that will cause SJM to break out from it's recent downward trend and close substantially higher at the end of 2014.

Let's take a quick look at a couple of SJM's competitors, ConAgra Foods (NYSE:CAG) and Mondelez International (NASDAQ:MDLZ). SJM is trading at the lowest P/E of the bunch, coming in at 18, versus 21 and 23. J.M. Smucker also has better operating margins & profit margins, with a higher ROA to help support it's position. Lastly, SJM's debt situation is much more favorable, with much lower debt ratios and higher quick- and current-ratios. J.M. Smucker is the type of company that I want to own for the long haul, and this appears to be an opportune time to add to my position.

J.M. Smucker also has a solid yield for such a stable company. You literally get paid to wait. SJM has a current yield of about 2.4%. Though this might not be as large a yield as many DGI are used to, J.M. Smucker is due to raise it's dividend again this year, which drives price appreciation. During the financial crisis, J.M. Smucker did not cut it's dividend. In fact, it raised the dividend! J.M. Smucker is a Dividend Contender and has raised it's dividend every year for 16 years. It's five year dividend growth rate of 12% is a much faster pace than inflation. That means that if you are relying upon dividend income to sustain you, you would not lose purchasing power over time. In fact, it would grow. SJM is both a buyback king and a dividend king!

Combined with their sales growth and share buyback activity, there is one other thing to mention. In early December, Wells Fargo downgraded J.M. Smucker's stock due to concerns with their coffee business. The research note also mentioned that input prices could rise. In recent months, coffee input prices have risen slightly, but they are still very depressed, looking back over the past year. For reference, a futures contract of coffee sold for over $150 a year ago, but today they sell for $118. True, it's higher than it was a few months ago, but it is much lower than it was a year ago. I feel that the downgrade was unwarranted, but I welcome the opportunity to add to this position.

As always, this article represents my opinions at the time of writing. You should do your own due diligence before making any decisions. However, I believe that J.M. Smucker represents a quality company that is trading hands at a discount.

Disclosure: I am long SJM, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.