J. M. Smucker: Funny Name, Seriously Sweet Profits

J.M. Smucker Co. (SJM) is known for the sweet, sticky stuff, but hopes shortening and biscuits will fatten its bottom line. The #1 U.S. producer of jams, jellies, and preserves also makes dessert toppings, juices, and specialty fruit spreads under names such as Laura Scudder's and Dickinson's.

To diversify, the company added market leaders Jif peanut butter and Crisco oils and shortening. Smucker owns other brands as well. Parent of International Multifoods, the company's roster includes baking-goods brands Hungry Jack, Martha White, and Pillsbury, along with Pet evaporated milk.

Part of the story here is market share. Smucker's Jif peanut butter recently gained at the expense of Peter Pan, the latter made by ConAgra (CAG). The production line for Peter Pan was shut down when salmonella was found. That left empty shelf space for Jif to fill. Con Agra will fix its operating problems soon, but Jif is finding new bread to peanut butter as consumers still want the tasty spread, even if it doesn't have Peter Pan on the label. Analysts believe Smucker will continue to benefit even after Peter Pan comes back in full strength.

Another part of the story is earnings. They've been growing nicely. In the last 5 years, they averaged 16% a year while sales ramped at 7.5% a year, on average. Analysts predict future revenues growing by 7% a year, on average, in the next 5, and earnings to improve by 9.5% a year, on average, in the same time. Earnings over the last 3 years have been $2.60, $2.65, and $2.89. Expectations are for $3.10 this year and $3.40 next year.

These aren't exciting numbers unless you get stimulated by good, steady growth, the kind that gives comfort in volatile markets. Other numbers that aren't heart racing but solid: Return on Equity is 8.9%. The yield is 2.1%. The dividend payment is 42% of net profits. Current assets outnumber current liabilities by more than 2.5 to 1 with $200 million of it in cash (out of $639 million in current assets). The stock has acted very nicely over the last 7 years, steadily moving higher from a base of $15 in 2000 to its recent all-time high of $64.30. The stock is off about 15% from there. The Smucker family still owns 8.2% of the stock.

The road ahead has some bumps for Smucker, even with earnings expected to increase. Much of the problem comes from costs. In the last conference call, management made a point of saying that raw material costs such as soybean oil, peanuts, milk, corn sweetener, and wheat along with energy expenses will be noticeably higher in fiscal 2007 (year ends in April). Price hikes will offset some of these as well as cost-cutting where possible. Last year the company eliminated its low-margin Canadian grain based food service business. That will increase margins going forward. Other positive developments: the company released 40 new products and expanded its distribution of many existing product lines in 2006. Expect more new products and wider distribution.

Smucker makes comfort food such as peanut butter and jelly. It also makes comforting profits. There's nothing flashy here, no major catalyst to vault this stock much higher any time soon. It's just one of those steady performers, much like offensive linemen in football who get no glory but contribute greatly to success. If you're looking for a stock that just keeps delivering earnings, dig deeper into Smucker.

SJM 1-yr chart: