J. M. Smucker Company (NYSE:SJM) is struggling with soft volumes and higher costs, but given SJM’s track record it won’t be hurting for long.
SJM has long succeeded by organic sales growth and acquisitions, and there’s no reason those strategies should stop working. True, the coffee business has become increasingly competitive. At the same time, rising coffee prices have forced SJM to raise prices.
Predictably, volume is under pressure.
But SJM is hardly doomed by weakness in coffee. For one thing, there’s room for more mergers and acquisitions in that industry, as well as landing more branded licensing deals like the partnership by Smuckers and Dunkin Donuts (DNKN).
A talent for product innovation could also help rejuvenate the coffee segment, particularly in the K-Cup business, which is littered with brands and flavors.
Furthermore, like all agricultural commodities, coffee prices are volatile, whipped around by everything from heavy rains to drought in Brazil.
More challenging is the threat to packaged food companies from supposedly healthier and fresher offerings. Consumers are demanding products they deem to be more natural, and that doesn’t bode well for the maker of Jif peanut butter, Crisco and Hungry Jack.
But, again, that’s a problem that can be managed by adjusting its portfolio of brands. Consumer staples companies like Smuckers swap brands among themselves all the time. That’s how Smuckers came to own Folgers, which was once a part of Procter & Gamble (PG).
There’s no rule that says Smuckers can’t add brands that are perceived as being fresher and healthier by consumers. And there’s always some company willing to buy a brand as well-known as, say, Crisco.
A History of Outperformance for SJM Stock
SJM stock has been a long-time market beater even if it’s stumbled of late. Fiscal fourth-quarter earnings missed Wall Street estimates in early June, as did the company’s outlook for the new fiscal year.
But even after the ensuing sell-off, SJM stock was still beating the broader market by more than 10 percentage points year to date. Shares have an edge over the S&P 500 for the trailing three- and five-year periods as well. Indeed, SJM has more than tripled during the current bull market.
Smuckers stock might struggle to get its mojo back amid falling volumes for coffee and some packaged food, but neither of those sound like insolvable problems. Additionally, if operating margins continue to shrink as they did in the latest full-year period, the company can always move to cut costs.
As painful for they are for rank-and-file workers, the market loves restructurings. Heck, the last time Smuckers announced a restructuring, shares almost doubled over the next 52 weeks.
Smuckers is hardly bereft of options to deal with sluggish volumes and tighter margins. At some point, coffee prices will cycle back down. Indeed, the company sees the coffee business improving later this year and the contribution of its recent acquisition in the pet-food industry will juice sales.
Smuckers had a tough 2015, but the issues weighing on the company are by no means secular. With a 2.1% yield on the dividend, SJM looks like a good bet in the consumer staples sector.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
