The Bottom Fishing Club: JM Smucker (NYSE:SJM)

JM Smucker (SJM) is well situated as a “growth at a reasonable price” (“GARP”) buy right now. The company’s underlying business margins, sales, and outlook are remarkably stable over time, even during recessions. The growth at a fair price setup is quite similar to my selections in November of Monster Beverage (MNST) here or F5 Networks (FFIV) here on Seeking Alpha. Both have performed better than the overall wild swings and downtrend in the S&P 500, sporting flat to higher investment results the past six months.

Smucker sells food products under the Folgers, Café Bustelo, Dunkin’ Donuts, 1850, Jif, Smucker’s, Crisco. Meow Mix, Kibbles n Bits, 9Lives, Nature’s Recipe, Milk-Bone, Pup-Peroni, Rachael Ray Nutrish, Natural Balance, Robin Hood, and Five Roses brands. Brand name staples in the jam/jelly, peanut butter, coffee, and pet food aisles of your local supermarket are the “bread and butter” of the business model.

Image Source: Company Website

In terms of stable consumer food demand, tightly controlled operating costs and defensive low-volatility trading characteristics, few blue-chips match up with JM Smucker. Another recessionary food buy suggested in March was Coca-Cola (KO). The biggest differences are Smucker’s U.S. focus vs. Coke’s international footprint; Smucker’s lower profit margins; and lastly, because of these slightly higher business risks, Smucker has cheaper valuations on sales, earnings and free cash flow generation.

JM Smucker has been an initial beneficiary of the coronavirus economic shutdown. Shoppers and consumers have increased their buying of food staples like jelly/jam items, stockpiling for future shut-ins and quarantines. I am forecasting buying trends will remain above normal throughout 2020 as the COVID-19 distancing and eating at home realities last until a real treatment or vaccine is available. Just last week, management raised guidance for this quarter, including March and April. For sure, Smucker’s popular food items combined with pandemic buying trends to turn the company into one of the true beneficiaries of the crisis.

Free Cash Flow Valuation

Free cash flow yields are the honest attraction for me. Free cash flow vs. price is a main determinate of value for famed investor Warren Buffett, and is the standard-bearer for analytics by the vast majority of Wall Streeters. Well, if you are a disciple of stable free cash flow generation, and the upfront cost to purchase it, Smucker should be near the top of your buy research list in May 2020.

Using the company’s own guidance for the fiscal year ending in April, JM Smucker will produce around $8.30 in adjusted per share earnings, and upwards of $1 billion in free cash flow. At the current $114 quote, the business has a rough $13 billion equity capitalization. So, if you purchased the whole company at the prevailing stock price, you could theoretically pocket an after-tax 7.4% free cash flow yield on your money. Plus, this number will likely rise over time from Smucker’s super conservative business setup and strong consumer brands! Name me a similar company setup that delivers anywhere near 8% in cash returns during the coronavirus recession? There are not many, if any.

Below are charts of some basic financial ratios on a 5 and 10-year basis. Price to trailing earnings, sales, cash flow and free cash flow are pictured. Taken together, JM Smucker is the cheapest it has been against historical financials since 2012.

So, why is the company inexpensive to own? Are sales imploding? No. Are profit margins going straight down? No. What gives? Essentially, stagnant sales for a number of years is the first reason. A second is Wall Street has largely forgotten about Smucker’s investment proposition as other higher growth technology ideas have been the leading total return picks during 2016-19. Below is 10-year graph of incredibly stable gross margin on sales, net profit margin after taxes, overhead and interest expense, plus income returns on total company assets employed. Using this quick check-up on business results, Smucker’s operations appear to be performing just fine.

Dividend Story

Another exciting part of the JM Smucker buy opportunity is its dividend yield. Today’s 3% yield is far better than the S&P 500 average on “trailing” payouts of 1.9%, or the ENTIRE Treasury yield curve under 3% presently. Below are some charts of the dividend opportunity.

For income-minded investors, the dividend payout has more than doubled the last decade, rising about 8% annually. On the second chart, I have drawn the payout ratio as a percentage of cash earnings. In contrast, the S&P 500 trailing number was above 45% in 2019. Then contemplate Smucker’s rock-solid dividend payout situation vs. likely dividend cuts during 2020 by 25% of S&P 500 companies, a consequence of recession and imploding profitability. Goldman Sachs estimated a 25% scenario weeks ago. To be truthful, income investors should be frightened this number may turn out to be an optimistic forecast, if we get a prolonged coronavirus pandemic economic slide. All told, the Smucker dividend (1) is today higher than most “safe” investment alternatives, (2) has much better long-term support from operations than other U.S. businesses, and (3) has stronger opportunity to increase markedly in 2020-21.

Positive Technical Momentum

JM Smucker is one of only a handful of U.S. stocks to manage a robust gain year-to-date, above 10% in total returns. The typical U.S. equity has backpedaled 10-15%, depending which index you want to use. The chart below highlights steady buying trends in the stock the past 24-months. I have circled in green the nice uptrend in Smucker vs. the sharp drawdown in the S&P 500 during February-March. The large uptick in relative performance coincides with the coronavirus economic shutdown and flight to safety into defensive names with business operations unaffected by stay-at-home quarantines. Plus, the Negative Volume Index (‘NVI’) and On Balance Volume (‘OBV’) lines are quite positive. I don’t see any evidence on the ground of Smucker equity selling, outside of normal supply patterns.

Final Thoughts

Is JM Smucker the cheapest stock I can find? No. But it will fit nicely in a prudently constructed portfolio. It is trading at the cheapest financial ratio setup since 2012. Yet back then interest rates were higher and the S&P 500 valuation metrics were much, much lower. Free cash flow creation is well worth a look, as is its defensive and stable underlying business in the coronavirus recession. In addition, the dividend yield is high and uniquely sustainable vs. other investments.

My conclusion: relative to the U.S. stock market and alternative bond security investments, JM Smucker is at its strongest buy entry point in quite some time.

I would employ JM Smucker as a “long” holding in a diversified and hedged, long/short portfolio design. I am projecting the stock position will outperform the overall S&P 500 total return the next 3-5 years, perhaps by a wide margin if America finds it difficult to recover from the pandemic.

You can happily visit your local grocer and know each JIF peanut butter and Smucker jelly purchase is putting money back in your pocket. Heck your purchase might even deliver an earnings beat and increase your net worth, with the rising stock quote. Eating a quality American-made food item is just icing on the cake. Talk about a win-win!

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SJM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

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