Earnings Scorecard: J.M. Smucker

| About: J. M. (SJM)
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The J. M. Smucker Company (NYSE:SJM) reported fourth-quarter 2010 earnings on June 18, 2010 that surpassed the Zacks Consensus Estimate, driven by better-than-expected gross margin expansion and a lower tax rate.

Analysts have now had more than a week to digest the news. Below we cover the recent earnings announcement, including the subsequent analysts estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.

Earnings Report Review

Smucker delivered earnings of $1.07 per share in the fourth quarter, exceeding the Zacks Consensus Estimate by 27 cents and fourth quarter 2009 by 5 cents per share.

Smucker posted flat year-over-year net sales of $1,069.1 million for the quarter. The quarter experienced solid sales growth in the U.S. Retail Consumer Market business, which was offset by the drop in sales at its U.S. Retail Oils and Baking Market, and the U.S. Retail Coffee Market. The quarterly volume declined 1%.

Gross margin for the quarter expanded 280 basis points year-over-year to 40.2%.

Earnings Estimate Revisions – Overview
Analysts remained bullish on Smucker, based on its strong cash flow generating capabilities and healthy balance sheet. Moreover, the company’s ability to pay dividends and buyback shares portray that it is well positioned for future growth. To gain edge over its competitors, Smucker’s has been investing in new products and brand enhancement activities, which builds a solid platform for fiscal 2011.

With respect to guidance, Smucker forecasted fiscal 2011 earnings in the range of $4.50-$4.60 per share, which excludes restructuring and merger along with integration costs, but includes intangible asset amortization. Excluding revenue from acquisitions, the company expects net sales to grow 3% for fiscal year 2011.

Agreement of Estimate Revisions

In the last 7 days, none of the analysts covering the stock changed their estimates. However, in the last 30 days, 9 out of 13 analysts covering the stock raised their estimates for fiscal 2011 with only one analyst lowering their estimate. With respect to first-quarter 2011, only 4 analysts lifted their estimates, with no downward changes. We believe that the robust balance sheet, strong cash flow and brand enhancement initiatives will provide the company a platform to deliver steady growth as the economy revives.

Magnitude of Estimate Revisions

The magnitude of estimate revisions indicates that the analysts were buoyed by Smucker’s healthy fourth-quarter 2010 performance and optimistic outlook. In the last 30 days, the Zacks Consensus Estimate climbed 2 cents in first quarter and 11 cents for fiscal 2011. However, in the last 7 days, the Zacks Consensus Estimate remained stagnant both for first quarter and fiscal 2011.

Smucker Holds Zacks #3 Rank
Smucker’s shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation. Our long-term recommendation for the stock remains Neutral.

The J.M. Smucker Company is well-established fundamentally with solid execution in its core business. Smucker continues to enhance its brand equities, product and operational innovations, and brand portfolio expansion.

The company exited the quarter in a strong financial position. It paid down $625 million of debt during fiscal 2010, and increase its dividend in April 2010.

According to the acquisition agreement of the Folgers’ acquisition, Smucker is restricted from repurchasing its shares until November 2010. After the restricted period, Smucker’s buy-back action will provide meaningful upside to its current value.

With the revival of the economy, the company plans to use its robust cash flow to reward shareholders through dividend and stock repurchases. Also, Smucker continues to look for attractive acquisitions.

However, rising commodity costs and increasing investment in brand growth continues to weigh upon operating margins. In the midst of slow global recovery, the consumers may be less willing or able to pay a price differential for the company’s branded products and may increasingly purchase lower-priced offerings.