Here's How J.M. Smucker Is Doing So Far This Year
Summary
- J.M. Smucker’s higher pricing action due to higher green coffee bean costs resulted in lower coffee demand in the U.S.
- Higher coffee prices reduced coffee demand within its international, foodservice, and natural foods division as well.
- The U.S. retail consumer foods segment represents J.M. Smucker’s only segment to increase profitability due to lower capacity expansion costs.
On Nov. 26, food and beverage company J.M. Smucker (NYSE: NYSE:SJM) came out with its Q2 fiscal year 2015 10-Q which follows up in more detail on its earnings announcement released on Nov. 19. The company has performed terribly so far this year. Let's take a look to see what's happening.
Lousy fundamentals
J.M. Smucker saw its revenue and net income decline 3.6% and 2% respectively so far this year. Both the top and bottom lines were largely affected by the U.S. retail coffee segment (see table below). The company saw huge spikes in green coffee bean costs which compelled the company to raise its prices. Consumers revolted driving segment volume down 9% resulting in the material impact on revenue and net income. Management expects that higher prices will continue to have a negative impact on the U.S. retail coffee segment's operating income in the second half of the fiscal year.
Higher green coffee prices also affected coffee demand within J.M. Smucker's international, foodservice, and natural foods segment though the segment's impact on total revenue and net income was less significant.
J.M. Smucker Year-to-Date Revenue | ||||
10/31/14 | 10/31/13 | Difference | YOY | |
U.S Retail Coffee | $1,035.70 | $1,109.30 | -$73.60 | -6.6% |
U.S. Retail Consumer Foods | $1,127.80 | $1,149.00 | -$21.20 | -1.8% |
International, Foodservice, and Natural Foods | $642.10 | $652.50 | -$10.40 | -1.6% |
Total Revenue | $2,805.60 | $2,910.80 | -$105.20 | -3.6% |
J.M. Smucker Year-to-Date Operating Income | ||||
10/31/14 | 10/31/13 | Difference | YOY | |
U.S Retail Coffee | $288.80 | $323.20 | -$34.40 | -10.6% |
U.S. Retail Consumer Foods | $231.20 | $196.20 | $35.00 | 17.8% |
International, Foodservice, and Natural Foods | $80.60 | $90.50 | -$9.90 | -10.9% |
Total Operating Income | $600.60 | $609.90 | -$9.30 | -1.5% |
Source SEC Filings and author's calculations
The U.S. retail consumer foods segment saw its year-to-date sales fall 2% due to lower prices vs. the same time last year. Overall, volume was actually flat. However, negative volume in its Pillsbury portfolio served as the primary catalyst for the even volume comparisons. Operating profit increases in the consumer foods segment, due to the lack of startup costs from capacity expansion last year, served as a buffer against further net income declines.
J.M. Smucker's year-to-date free cash flow went to a negative $28.6 million vs. a positive $86 million the same time last year. The increase in green coffee prices filtered down to the operating cash flow which decreased 50%. A 36% year-over-year increase in capital expenditures also contributed to free cash flow going negative.
Balance sheet
J.M. Smucker's cash balance registered at $105 million last quarter representing a microscopic 2% of stockholder's equity. I always like to see companies possess cash amounting to at least 20% or more of stockholder's equity as a margin of safety for tough times, self-financed acquisitions, and product innovation.
J.M. Smucker's long-term debt amounted to 37% of stockholder's equity which lies reasonably below my personal threshold of 50% or less. Long-term debt creates interest which chokes out profitability and cash flow. So far this year, J.M. Smucker's operating income exceeded interest expense by 13 times. The rule of thumb for safety lies at five times or more.
Dividends
J.M. Smucker paid out $124 million in dividends so far this year. J.M. Smucker's negative free cash flow means that this payment isn't covered. However, the holiday season is generally good for companies like J.M. Smucker. Last year the dividend to free cash flow ratio amounted to 41%. I prefer to see a company pay out 50% or less in dividends, retaining the remainder for other uses. Hopefully, the holiday season will make J.M. Smucker free cash flow positive, giving the company a decent dividend sustainability ratio for FY 2015. Currently, the company pays its shareholders $2.56 per share per year and yields 2.5%.
How does this fit into the big picture?
J.M. Smucker plays the delicate balance between pricing and demand volume. Sometimes it doesn't work. Management expressed complete confidence in its ability to manage the company over the long-term. The company has a decent track record growing its revenue, net income, and free cash flow 195%, 333%, and 476% over the past 10 years (see chart below). This translated into a total return of 213% vs. 115% for the total return of the S&P 500 during that time (see second chart below).
SJM Total Return Price data by YCharts
The takeaway
J.M. Smucker's coffee demand may get back on track if the price/demand equation balances back out. Also the company possesses a strong product innovation pipeline. Currently, the company trades at a P/E ratio 18.5 vs. 18.7 for the S&P 500 and 18.4 for the company's five year average according to Morningstar. On a forward basis J.M. Smucker trades at a P/E ratio of 18.1 vs. 18 for the S&P 500 making the company fairly valued. Investors can collect dividends while waiting for capital gains and buying more on the dips.
This article was written by
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