Rudd: Stocks to mull over after large Thanksgiving dinner

In last week's column I discussed how at the end of each year I offer up 12 investment ideas, the performance of which I then review a year later. The list is designed to be a catalyst to stimulate ideas and thinking on your part regarding potential investment candidates. It is not meant to be a working portfolio.

Nonetheless, I appreciate the interest and value many of you seem to place on the list. However, to those who requested a copy in advance; even my wife does not know who made the cut. So continue with your own research and after the Thanksgiving holiday we delve into how my picks from last year performed. I will also offer up another group of 12 for your investing pleasure.

Now I know what you are thinking...well how about one investment idea to go with your Thanksgiving dinner. OK, a company that comes to mind this time of the year is J.M. Smucker (SJM). Most of you probably know the company for its jam and peanut butter. Yet, it receives more revenue from coffee than from either of those two products.

SJM's product portfolio also includes such items such as shortening and oils, baking mixes and ready-to-spread frostings, canned milk, flour and baking ingredients, juices and beverages, frozen sandwiches, toppings, syrups, and pickles and condiments.

The company's financial results are just as tasty...or at least they used to be. When I wrote about the company a year ago my earnings target for the fiscal year ended April 2013, was $5.83 per share with an estimated 12-month share price of $120. Unfortunately, the company did not hit either of those targets. Earnings came in at $5.64 and the shares closed recently at $101.66. The funny thing is that I still like the company going forward.

Recently announced results for the second quarter ended October 31, indicated a 5 percent overall drop in sales. The company admitted to making a serious "misstep" with its recent price increase, which caused sales volumes to drop 20 percent. Reduced promotional effectiveness and competitive activity also contributed to the decline as customers delayed purchases and shifted to cheaper private-label brands, resulting in net income for the quarter of $1.55 per share.

The rise of K-cups and Keurig brewers has not been all bad, as it presents SJM with an opportunity to capitalize on the other side of the equation: Roast & Ground (R&G) and Premium coffees where SJM holds significant brand influence and a market penetration of 54 percent relative to other brands.

R&G coffee sales are seeing stronger growth leading to the Folgers brand chalking up 2 percent sales growth for the quarter on top of a 4 percent increase last year. Folger's Gourmet Selections K-cup also realized solid gains.

Moreover, SJM is still among the most attractively priced food stocks with an enterprise value 19.7 times greater than free cash flow (EV/FCF). The ratio illustrates a company's value per each dollar of FCF and in this case it means SJM is undervalued with considerable potential for accretive activities going forward. SJM is poised to grow its free cash at rates in line with its peers, under the leadership of excellent management.

A decline in the P/E ratio to a number less than 15 would also merit considerable interest, reflecting a 23.3 percent discount from the current trailing twelve month P/E of 18.93. For its fiscal year ending April 30, 2015, SJM now expects net sales to decrease approximately 1 percent, compared to 2014. Income per share is projected at $5.45 to $5.65.

The intrinsic value of the shares, using a discounted earnings model with an earnings growth rate of 8 percent and a discount rate of 12 percent is $95.42, due to lower earnings. The more conservative free cash flow the firm approach yields an intrinsic value of $126 per share.

My earnings estimate for this fiscal year is $5.70 per share with a 12-month share price projection of $117, yielding a 15 percent capital gain. There is also an indicated dividend yield of 2.6 percent. Of note is that SJM has been increasing dividends for 16 consecutive years.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 10 AM and 3 PM EST at (941) 706-3449.