Consumer Sector Ideas

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Smucker -- >>> A More Diverse and Stable Coffee Play



By Matthew Frankel

May 29, 2013

Tickers: GMCR, SJM, MKC, SBUX


http://beta.fool.com/kwmatt82/2013/05/29/a-more-diverse-and-stable-coffee-play/35493/?source=eogyholnk0000001




When most people think of J.M. Smucker (NYSE: SJM), they think of the fruit spreads and peanut butter products that bear the “Smucker’s” name in the grocery store. But the company has evolved into a very diverse food company whose main source of revenue is coffee. As one of the largest producers of the increasingly popular “K-cups”, Smucker stands to benefit tremendously from the growth in their sales. My only reservation is that perhaps the company is a bit expensive after rallying by more than 35% in the past year.

About J.M. Smucker

Smucker operates in three major segments: coffee, consumer foods, and international, and foodservice and natural foods The coffee segment is the largest, and accounts for about 42% of the company’s revenues. This segment sells products under the Folgers brand name, which it acquired in 2008, as well as Dunkin Donuts packaged coffee and Millstone K-Cups.

Since 2010, Smucker and Green Mountain Coffee Roasters (NASDAQ: GMCR), the maker of Keurig coffee machines, have operated under a partnership agreement that lets Green Mountain manufacture K-Cups using Smucker's coffee brands, including the very popular Folgers Gourmet Selections. The increasing popularity of the Keurig brewers and the K-Cups they use have been great for both companies’ profits in recent years. In fact, once the market realized that even the expiration of Green Mountain’s patents wouldn’t hurt sales, shares of Green Mountain climbed from a low of $17 last year to over $70 currently.

The consumer foods segment consists of the Smucker’s, Jif, Pillsbury, and Crisco brands of grocery products. These brands are also produced, among others, in the international, foodservice, and natural foods segment for the company’s overseas customers.

Acquisitions

A major aspect of Smucker’s growth strategy includes acquiring brands that it believes will be valuable to this business. As mentioned before, the most significant coffee acquisition was the Folgers brand in 2008. Other major acquisitions include Rowland Coffee Roasters, which includes the Café Bustelo and Pilon coffee brands, and the Sara Lee brand just last year.

The Numbers Game

Taking a quick look at the numbers behind J.M. Smucker reveals a seemingly high P/E ratio of 21.8 times TTM earnings. The company is expected to earn $5.73 for the current year, rising to $6.29 and $6.90 in 2014 and 2015 respectively, for annual earnings growth of 9.8% and 9.7%. This growth rate is a little bit low to justify such a high valuation, but some of this could be due to speculation of Smucker being a takeover target, especially after Heinz received an offer, as they are a close peer size- and product-wise.

Alternatives

Let’s take a quick look at what you could invest in instead of Smucker. In the coffee business, Starbucks (NASDAQ: SBUX) is the logical play, and on the grocery side, McCormick (NYSE: MKC) is a good comparable company.

Starbucks is the world’s leading coffee roaster, and its coffee is sold through its 18,000-plus stores, as well as in grocery and other retailers throughout the world. The company, which arguably started the premium coffee craze, has done extremely well, more than tripling its revenues in the past decade alone.

As an investment, Starbucks' shares may be a little on the pricier side right now, at 32.2 times TTM earnings. I’m not sure that the forward growth rate of around 15% justifies such a high valuation, and Starbucks’ market may be getting a little bit saturated at this point. I have to think that its growth will start slowing down a bit in the coming years.

McCormick & Co is a play on the food business, a leader in spices, seasonings, and flavorings. About 60% of the company’s sales go to retail customers, with the other 40% go to foodservice customers such as restaurants. At around 24.1 times TTM earnings, McCormick may be a little expensive, with just 8% annual earnings growth expected over the next few years.

Buy, Sell, or Hold?

With exposure to the rapidly growing single-serve coffee industry as well as to the stable packaged food business, Smucker just may be an ideal compromise between the two. I would like to see shares pull back a bit, as I would with most stocks right now. But even at the current price levels, I believe Smucker has a lot to offer.

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