J.M. Smucker: Buy The Dip

Summary

• SJM stock has fallen hard after AMZN acquired WFM.
• The stock is now in a relative valuation trough while the dividend yield is as high as it has been in 5 years.
• The Street estimates seem reasonable, and so we think SJM is worth a look here.

J.M. Smucker (NYSE:SJM) has had a rough year. The stock is off some 10% YTD, while the S&P 500 has rallied more than 8%. A large part of those declines have come in the wake of Amazon's (AMZN) acquisition of Whole Foods (WFM). The prevailing fear is that Whole Foods normally high-cost goods will soon cost a lot less, and that this price drop will cause consumers to start choosing WFM's organic-focused brands over SJM's brands.

SJM data by YCharts

While the logic there seems reasonable, we think that SJM stock is worth a look here after this recent sell-off. We aren't alone in this thinking. Hilliard Lyons lifted SJM to a Long-Term Buy rating on Tuesday, 7/11.

SJM's current under-performance of the S&P 500 is as big as it has been since 2012. Looking at a 5-year window, such under-performance usually doesn't last very long. Per the chart below, the last time SJM significantly under-performed the S&P 500 was in 2014. That under-performance preceded a huge 2-year run-up in the stock. Today's dramatic under-performance looks like a similar set-up for a big stock run higher.

SJM data by YCharts

Moreover, SJM's EBITDA multiple has fallen into a trough, and history shows us that such valuation troughs are near-term "buy the dip" opportunities.

SJM data by YCharts

The recent price drop in SJM also means the stock's yield has climbed to 2.6%. That is as high as it has been in the past 5 years. The last time the stock's yield was near this high was back in mid-2012, before the stock took off from $70 to $150 by mid 2016.

SJM data by YCharts

Overall, we think SJM stock has several buy signals at these levels.

Fundamentally, we also think the stock is undervalued. The organic, health food trend isn't really working in SJM's favor, but brands like Smuckers and JIF will always sell, regardless if WFM gets cheaper or not. Consumers foods revenues should rise at a low single-digit rate over the next several years. The coffee segment isn't doing great, but again, coffee is a product with secular demand, and we see declines in that segment moderating.

Overall, SJM is a business with low single-digit revenue growth potential. Gross margins are stable around 39-40%, but the company should be able to grow operating margins as costs are coming out of the system. Management is planning for $450 million in cost reductions by FY20.

Low single-digit revenue growth, slight operating margin expansion, and share buybacks should drive mid single-digit earnings growth. EPS is expected to grow about 4% per year over the next several years. In other words, we don't see any risks to the Street estimates.

Overall, it feels like the current sell-off is over done. Not much has changed about the SJM growth story as a result of the AMZN-WFM acquisition, but the stock is acting like a whole bunch has changed. This disparity is creating a buying opportunity for long-term oriented investors.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SJM over the next 72 hours. 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.