Amid Rising Coffee Prices, J.M. Smucker (SJM) Could Still Brew Gains for Shareholders - Barron's (SBUX, PG)

December 6, 2010 10:45 AM EST
Despite J.M. Smucker (NYSE: SJM) anticipating another price hike to their Folgers coffee brands, Barron's believes that the company is still an attractive value proposition for investors. Smucker has already increased the price on Folgers by 13% this year, and the company is contemplating the fallout if they increase the price any more.

Investors have also had concerns about rising commodity prices pressuring margins. Shares have only gained 6% in FY10 so far, and, at 12x estimated FY11 earnings, trade below the industry average of 15x FY11 EPS estimates.

Barron's believes that the concerns may be a little overblown, considering the broad spectrum of offerings, a strong balance sheet, and opportunities for growth both organically and through acquisitions.

Products offered, which are either leaders or close to the top in their respective categories include: Jif peanut butter, Crisco oils, Magic Shell ice-cream topping, and Hungry Jack pancake mix.

Coffee, however, accounts for 35% of sales and nearly 50% of profits.

Smucker acquired Folgers from Procter & Gamble (NYSE: PG) in 2008 for a consideration of $3.3 billion. Additionally, Smucker also owns Millstone, and has marketing rights with Dunkin' Donuts.

Coffee prices worldwide are at 13-year highs, however, due in part to wet weather cutting yields and crop quality, increasing demand, and alleged crop hording in major coffee-producing regions. As a result, prices have increased 35% since May, and 60% over the last two-years.

Revs for the segment increase 7% to $477 million last quarter, but overall sales volume fell by 7%. Excluding coffee, Smucker saw $4.6 billion in revs with a 7% boost in net income to $494 million last quarter. The quarter also saw operating margins of 21%, which beat expectations. Lower promotional spending may have strongly affected the results.

Additionally, Smucker is currently holding net debt of $760 million with $450 million in free cash flow.

Although the price of coffee is increasing, Smucker might see a benefit as consumers trade down from more expensive brands, like Starbucks (Nasdaq: SBUX), and $450 million in free cash would do wonders to percolate investor confidence.

Shares J.M. Smucker are trading 0.45% lower this morning.


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