PB&J king J M Smucker Co (ticker: SJM) is reporting quarterly earnings this week from a position that — for SJM stock — is somewhat rare.
Namely, SJM is trying to shake off both poor operational performance and some particularly weak movement in the stock — an uncommon combo for the typically sturdy, reliable foods company.
Smucker has been a longtime outperformer of the Standard & Poor’s 500 index, quietly but significantly outperforming the market with an annual gain of 10.34 percent since its 1994 initial public offering, to the S&P 500’s 9.69 percent. That might not sound like much, at just 65 basis points in difference, but that adds up to roughly 825 percent returns versus 710 percent for the broader market.
However, SJM has run into a longer skid of late, and Wall Street is increasingly souring on jam’s most famous purveyor.
The headline numbers. Wall Street expects $1.72 per share for Smucker’s fiscal fourth quarter, implying a 19 percent explosion in earnings. But that’s almost deceivingly optimistic.
For one, Smucker isn’t necessarily good for it. SJM has a decent history of beating the Street, but it’s not pristine, with seven quarterly upside surprises over the past three years — but three mere matches and two misses, too.
[See: 9 Food-Focused ETFs to Feed Your Portfolio.]
Also, those profits are expected to come on a 2.1 percent decline in revenues, which should cap a 5.5 percent full-year slide on the top line.
It’d be a lot easier to shrug that off if it weren’t for the fact that SJM is turning back from a couple years of revenue growth. Or the fact that Wall Street is estimating a rebound of just 1.3 percent in sales next year to $7.48 billion — still no higher than the top line for the 2016 fiscal year. Or the fact that SJM stock is mired in one of its deepest, most prolonged slumps since the 2007-09 financial crisis and Great Recession.
The “why” is most troubling, though.
Bear jamboree. Bernstein analyst Alexia Howard downgraded SJM and some other companies in the space — including ConAgra Brands ( CAG), Kellogg Co. ( K) and Campbell Soup Co. ( CPB) — in March, citing a number of weaknesses.
One worry was deteriorating revenue trends — strike one against SJM, though its troubles are more recent and less exaggerated than its peers. Another was valuation, which Howard believes will keep activist investors from diving in; SJM’s trailing price-earnings ratio near 23 is on the higher end of its historical valuations.
But most troubling was something that has been playing out for years — a growing preference for fresh foods over canned and packaged items, and a resulting deterioration in shelf space.
A recent Wall Street Journal report detailed the decay for packaged-food brands, pointing to research from Nielsen that shows, “In the year ended Feb. 25, sales volume for packaged food and beverages shrank by 0.4 percent — compared with growth of 1.7 percent for fresh meat, 1.9 percent for produce and 4 percent for deli-prepared foods during that period.” That trend doesn’t bode well for Smucker brands such as its namesake jellies, Jif peanut butter, Folgers coffee and Pillsbury baking goods.
Morgan Stanley analyst Matthew Grainger believes Wal-Mart Stores’ ( WMT) robust grocery sales growth is giving the big-box retailer better pricing leverage against food producers, and he points out data that shows a “positive inflection in private label trends” that would only intensify competition in the space.
[Read: Tasty Snack Foods For Any Portfolio.]
Buy to grow. While some diversified food companies have been jumping heavily on the organics and fresh-food bandwagons to counter some of these trends, Smucker has gone in a different direction.
Back in 2015, Smucker bought Big Heart Pet Brands — the name behind Milk-Bone dog treats and Meow Mix cat food — for $3.2 billion. That fueled a 37 percent jump in the top line last fiscal year, and gave Smucker some exposure to a rapidly growing market. But it hasn’t been all gravy of late, as SJM’s pet food business has suffered a couple of difficult quarters thanks to discounts by rivals like Purina and Petcare.
Just a few days ago, Smucker gobbled up ConAgra’s Wesson oil brand for $285 million, which SJM expects to add another $230 million annually to the top line. But the acquisition still doesn’t address either of the primary issues haunting Smucker and its competitors.
Smucker is a long-term winner, so it’s hard not to give the company some benefit of the doubt that these moves will prove themselves out over the next few years. But increased commodity costs and woes in a pet food business that’s supposed to be a growth driver are hurdles in the here and now. SJM may give up even more ground Thursday — a potential opportunity to buy for those more confident about the future.
More Earnings in Focus
Dave & Buster’s Entertainment (PLAY). 2014 was chock-full of potential blockbuster IPOs, including GoPro ( GPRO), TrueCar ( TRUE), GrubHub ( GRUB) and even Alibaba Group Holding ( BABA), but none of them have produced the explosive gains of Dave & Buster’s, which came out of the starting blocks quietly but has more than quadrupled from its offering price of $16. The eating-and-entertainment chain has cruised higher on a perfect record of earnings beats since its IPO, which it will try to extend Tuesday after the bell. Analysts are looking for earnings growth of 12.5 percent to 81 cents per share on 14.5 percent top-line growth to $299.85 million.
Michaels Cos. (MIK). Arts-and-crafts store chain Michaels hasn’t been nearly as profitable for investors since its 2014 IPO, underperforming the broader market 15 percent to 24 percent over a couple of years that have been a roller-coaster ride for investors. Right now, MIK is racing down a smaller hill. Michaels reports earnings before Tuesday’s bell, and Wall Street expects an 8 percent-plus improvement in profits to 39 cents per share on a mere 0.9 percent uptick on the top line to $1.17 billion. Indeed, Michaels is experiencing much of the same growth issues as other retail stocks, though it has been propped up a little by its 2016 acquisition of Pat Catan’s parent Lamrite West.
This Week’s Earnings Calendar
Monday. Casey’s General Stores ( CASY), JinkoSolar Holding Co. Ltd. ( JKS)
Tuesday. Ambarella ( AMBA), BazaarVoice ( BV), Canadian Solar ( CSIQ), Francesca’s Holdings Corp. ( FRAN), Lands’ End ( LE), United Natural Foods ( UNFI)
Wednesday. Tailored Brands ( TLRD), Verint Systems ( VRNT)
[Read: 5 Top Restaurant Stocks for Dividend Income.]
Thursday. Vail Resorts ( MTN), VeriFone Systems ( PAY)
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Has Smucker Stock Lost Its Magic Touch? originally appeared on usnews.com
