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Peter Mantas
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Peter Mantas, CIO of Logos LP. Experienced investor seeking value in the global capital markets. I aim to identify quality global businesses trading at a discount. Twitter: https://twitter.com/Logos_LP
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  • Could Your Grandma's Favourite Jam Be Made By One Of The Strongest Companies On The NYSE? 1 comment
    Apr 11, 2014 8:30 PM | about stocks: SJM

    On June 18th 2004, The J.M. Smucker Company (SJM) based out of Orville, Ohio reported fourth quarter earnings and the numbers were shockingly poor. Fourth quarter earnings fell nearly 5% on restructuring costs and lower sales of some of its largest brands like Crisco shortening. Moreover, net income fell to $22.2 million, or 44 cents a share, from $23.2 million, or 46 cents, a year earlier. Sales in the quarter ended April 30 declined 1.1% to $325.4 million, the first drop in more than three years.

    The market showed Smucker no mercy and shares of the company fell $2.15 to $46.50 on the NYSE and over the next year and a half, shares of the jelly and jam maker fell 14.62% to close at $39.70 on March 31st 2006.

    But as the going got tough, the tough got going.

    With solid management and a great business model intact, sales started to rebound, new brands were acquired and new products were rolled out. The company invested in innovation and in more efficient production methods. The company grew organically and through acquisitions, acquiring brands like Folgers from P&G and Sara Lee from Hillshire. Margins were expanding and free cash flow was growing at a robust pace.

    Results? Over the next 8 years, the company's share price surged 144.69% (18% annualized excluding its 2 and change dividend yield). The company with $22 million in quarterly net income in 2004 grew to a sizable $166 million in net income in its most recent quarter with over $1.4 billion in sales.

    Why is any of this important?

    After performing a close analysis on this company over the last 7 months, I believe that this family-managed company is going through a situation not so different from 2004. Over the last 6 months, shares of SJM have fallen nearly 8% due to lower volumes, lower sales and lower than expected earnings results. Guidance for the company has been revised downwards. Further, the company has locked in certain commodity prices for a long period of time which could affect their ability to seize margin opportunities in the short term. The company has also seen a 4% increase in SG&A costs and has passed on certain cost savings to the consumer, leading to lower revenue growth (for example, the company took an 8% list price decrease in oils earlier in the year). Over the last year, shares of the company are down 0.22% while the S&P has risen 18.78%. Needless to say, the company has experienced significant headwinds and is in the competitive, low to mid-single growth non-cyclical food sector.

    In light of recent market history, it has been and remains difficult for investors to find opportunities to buy quality, value-oriented American companies going through hard times. I believe SJM is one such opportunity.

    What exactly makes this a great opportunity?

    Quite simply, I believe SJM is trading well below intrinsic value based on what it is worth in the long term. SJM is a cash generating, compounding machine with over $2.4 billion in annual profits and over $10 billion in revenue as of FY 2013. The company is largely focused in the US, Canada and Mexico and last year the company had over $649 million in free cash with a free cash target of $850 million by FY17. Over the last 3 years the company has repurchased 12% of shares outstanding and has issued a free cash flow target of $600 million after certain capital expenditure goals for FY14 (which it will easily hit). Excluding special project costs, earnings per share were $1.66 this quarter and $1.47 last year, an increase of 13%. The growth in EPS was partially driven by gross profit, which excluding special project cost, increased $11 million or 2%. This resulted in gross margin improving to 37.4%, an increase of nearly 300 basis points over the prior year. Moreover, for the current fiscal year, the company has achieved its target of introducing 100 new products and has further product and growth initiatives planned for fiscal 2015.

    The company has tremendous scale and commands premium 'center of the store' presence in any supermarket given its roster of dominant brands and innovative products. Furthermore, the company has made large investments in logistics and production ($80 million facility expansion in Kentucky). It makes intelligent and timely brand acquisitions and investments at the right price for the long term (Enray Inc. and Guilin Seamild Biologic Technology Development Co., Ltd. In China) and enters into value add joint ventures with competitors (Keurig Green Mountain Inc.). Concomitantly, the company is committed to its "long-term growth algorithm": 6% increase in net sales, 3-4% increase in organic growth, and 2-3% through acquisitions, leading to an annualized estimated shareholder return of 11% per year. All in all, Smucker has margin growth which fuels organic growth, has seen earnings rise consistently year over year and is devoted to growing its business through new product and brand development. These are signs of a dynamic company managed by a team (the Smucker family has been involved with the company since its founding in 1897) which has demonstrated its ability to decisively deal with temporary problems.

    In fact, it is management's culture of ambitious goal setting that really impresses me. Not only does it focus the company and filter out excess noise along the way, but it enables the company to handle any setbacks by reinforcing a culture of forward progress. This is not to say SJM will certainly hit all of its targets since markets are often unpredictable, but given their business model, history, scale, fantastic marketing capabilities and quality management techniques, I am confident in SJM's continued ability to create long-term generational wealth.

    Disclosure: I am long SJM.

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  • Anyoption
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    Great article. I agree with you. Smucker will rebound
    12 Apr 2014, 01:43 PM Reply Like
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