Defensive Stocks: J.M. Smucker vs. P&G

Includes: PG, SJM
by: Daniel Agramonte

Several months back, Barron’s featured an article on J.M. Smucker (NYSE: SJM). The article highlighted the company as a solid opportunity, intimating it might be a good defensive play. I thought it would be useful to evaluate SJM through our value investor lens and also to compare it to its much larger Ohio-based neighbor, P&G (NYSE: PG). Keep in mind that SJM's annual revenue is $2 billion vs. $76 billion for P&G. Nevertheless, I thought it would be interesting to compare these two companies as defensive plays. In keeping with our value investing approach, let's look at SJM as if we were buying it by starting with our 5-criteria filter:

(1) Straightforward business, preferably with a repeat purchase model: Definitely; J.M. Smucker is in the food products group. Chances are you're already using their products (JIF peanut butter, Crisco shortening/cooking oil, J.M. Smucker jam and jelly, Pillsbury baking ingredients, PET evaporated milk, etc.). Their business is geographically focused, as well--sales of their products are focused on the US and Canada.

(2) Stable business: Business is as steady as peanut butter and jelly--which I would have to say, is recession-proof.

(3) Decent balance sheet: Looks pretty good (more on this later).

(4) Top notch management team: If it means anything to stay with the horse that got you here, then the team is top notch and proven. The co-CEOs are both descendants of the original J.M. Smucker. The founding family has operated the company since its inception.

(5) Industry leadership: If brand recognition counts for anything in the retail food industry, J.M. Smucker is clearly an industry leader.

Some additional insight: While I was working in the logistics field, J.M. Smucker was one of our accounts. Without violating any confidentiality, I'd like to share a little bit of what I learned. For example, J.M. Smucker started out with their jam/jelly/preserves and has added additional brands over the years. For example, they purchased the Crisco brand from their Ohio neighbor, P&G, when P&G was convinced consumers were moving away from preparing foods and moving towards prepared foods. While working with this account, I visited several SJM facilities. I have seen hundreds of manufacturing facilities in nearly every continent, yet I came away very impressed with their focus and operational excellence. Also, they are definitely on top of their logistics game--nothing to sneeze at given the high cost of fuel right now. By the way, P&G was also a customer.

Looking at selected J.M. Smucker's financials, let's compare them to their larger brethren, P&G:

• Price to book: 1.34 (P&G is 3.04)

• Cash on hand: $200 million or $3.60/share (P&G has $5,556 million or $1.77/share)

• Annual cash flow: $4.04/share (P&G had $4.40/share)

• LTD/cap: 17.9% (P&G's is 25.9%)

• Revenue growth since 2004: 56.8% (P&G has grown their revenue by 48.6%)

• Price to earnings: 14.6 (P&G's P/E is 20.5)

• Common stock dividend yield: 2.65% (P&G's dividend yield is 2.17%)

Clearly, much of P&G's revenue growth is due to their 2005 acquisition of Gillette. Interestingly, on a percentage wise basis, J.M. Smucker has actually grown their revenue even more during the same period. To summarize their business at a very high level:

J.M. Smucker:

• Focused products, primarily dealing with food preparation

• US and Canada exposure; limited exposure outside North America

• Sensitive to raw materials and supply chain costs


• Broad product base (everything from Pringles, Folgers and Pampers to Pantene shampoo)

• Significant international exposure

• Sensitive to raw materials and supply chain costs

So where does this leave us? It appears the market has recognized P&G's virtue as a defensive play. Still, based on its business, J.M. Smucker bears strong consideration as a defensive stock play. SJM's strong financials imply it will have no problems weathering the current economic storm. In fact, if one believes the US economy will eventually rebound from the subprime mess, it could be argued that SJM has even less risks than P&G.

As a value play, SJM is slightly above our maximum price/book of 1.2. Likewise, SJM's P/E is borderline--we like to see it no higher than 12. While SJM's balance sheet is good as a defensive stock, it's not quite in the compelling zone for a value play.

In closing, SJM bears consideration as a defensive stock, especially as bond yields begin feeling pressure from interest rate cuts. Long term, it's slightly above our stringent criteria, but the stock bears watching.

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