Smucker's Retains Its Neutral Tag - Analyst Blog


We reaffirm our Neutral recommendation on The J. M. Smucker Co. ( SJM ). While the company has solid long-term fundamentals, the recent weakness in K-cup sales and price declines mainly for coffee and peanut butter is hurting growth. Smucker also slashed its sales guidance for fiscal 2014.

Why the Reiteration?

Smucker posted weaker-than-expected second quarter fiscal 2014 results, reported on Nov 20. This was due to a 4% decrease in net price realization, reflecting price declines taken earlier in fiscal 2013, mainly on coffee and peanut butter. Also, volume declines in private label foodservice roast, ground coffee and cappuccino led to the sales decline in the quarter.

The performance of the K-Cup business was below the company's expectations in the second quarter, as sales of one of its K-cup brands, Millstone K-Cup, declined significantly in the quarter, probably due to increased competitive activity. The company has even lowered its K-Cup sales growth expectation to mid-single digit percent range for fiscal 2014 compared to its prior expectation of 15% growth.

Lowered K-Cups sales guidance and the expectation of unfavorable foreign exchange led to the cut in sales guidance for fiscal 2014. The company now expects fiscal 2014 net sales to decline 2% year over year worse than its previous expectation of 1% decline.

We are however optimistic on the company's long-term fundamentals. Strong organic sales growth, product innovation and cost savings measures have remained the company's strong points. The company's strategic acquisitions have also broadened its presence across emerging markets.

Smucker's partnership with Dunkin Brands Group, Inc. ( DNKN ) to produce Dunkin' Donuts packaged coffee brand and Green Mountain Coffee Roasters Inc ( GMCR ), the makers of K-Cups. Smucker supplies its Folgers Gourmet Selections and Millstone premium coffee brands in K-cup portion packs, which can be run on Green Mountain's Keurig brewers. These partnerships have been boosting the company's revenues since the past many quarters.

We are also encouraged that the commodity costs declined in the second quarter of 2014, primarily owing to lower green coffee costs.  However, the impact of pricing actions taken across all categories more than offset the benefit. Smucker currently holds a Zacks Rank #4 (Sell). Post Holdings Inc ( POST ) is a better-ranked stock, with a Zacks Rank #1 (Strong Buy).

DUNKIN BRANDS (DNKN): Free Stock Analysis Report

GREEN MTN COFFE (GMCR): Free Stock Analysis Report

POST HOLDINGS (POST): Free Stock Analysis Report

SMUCKER JM (SJM): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: DNKN , GMCR , POST , SJM

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