I’m a big fan of J.M. Smucker Co (NYSE:SJM), which is why I picked the consumer goods company as my entry in InvestorPlace’s Best Stocks for 2018 contest.
While it hit a bit of a rough patch when it sold off with the broader market earlier this month and also issues a recall for dog food containing possible euthanasia drugs, the stock is beginning to pick up steam again and I see that upside continuing for two main reasons.
The first is the company’s latest earnings report. For the fiscal third quarter, EPS came in at $2.50 (versus $2 last year), aided by a 35-cent boost from a lower tax rate. Expectations were for $2.13, so the quarter beat by 2 cents even without the tax law. Sales increased 1% thanks to a 2% bump in the company’s coffee business, as well as good pod sales.
Operating income was up 4% as costs were well controlled, and a 2% decline in the share count also helped drive the 6.5% gain.
EPS guidance for the whole fiscal year, which ends in April, was for $8.20-$8.30. Even with some reinvestment into the business, the decline in the expected tax rate from 27% to 23%, along with moderate gains in operating income and continued share buybacks, should lift EPS to $8.80.
The second reason is the company’s recent positive meeting at the Consumer Analyst Group of New York (CAGNY). A good bit of the conference discussed management’s plan for coffee, which is their largest category. There is a good growth opportunity here for SJM as it reworks its portfolio to be more like the overall coffee industry, where the fastest-growing segments are One Cup (42% of the total) and Premium (25%).
For SJM, One Cup only accounts for 24% of sales and Premium is 12%. The company is already enjoying big improvement in the first category, which has driven a 15% and 12% expansion in Café Bustelo and Dunkin’ Donuts, respectively, through the first nine months of the year.
Smucker Stock Is Waking Up Sleepy Brands
Management is also making efforts to wake up its sleepy Folgers brand with 1850, which came out last week. A single-serve version of 1850 will be released in April. While it will be cannibalizing sales from traditional Folgers, SJM views this as a necessary move to drive 2%-3% category growth.
The company gave very limited EPS guidance for fiscal 2019, but gains are expected to be greater than its historical average of 8%. SJM will be able to accomplish this despite an anticipated mid-teens increase in marketing expenses and a continued rise in freight costs by cutting costs with its zero-based budgeting.
This will help SJM realize $50 million in cost savings over the next two years. In addition, since its fiscal year ends in April, the company still has over half of its tax cut savings to recoup in 2019.
While the food industry is continually challenged by consumers’ changing preferences, SJM remains a very cheap stock and quality investment, especially when you consider how well the company is executing its strategic plans for future growth. That puts it high on my list for 2018 and beyond.
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Source: Investor Place