uploads///SJM Valuation

Why J.M. Smucker’s Low Valuation May Not Be Appealing to Investors



SJM’s valuation summary

As of September 18, 2017, J.M. Smucker (SJM) stock was trading at a forward PE (price-to-earnings) multiple of 14.1x, which is significantly below the peer group average of 19.4x. SJM stock is now trading at a discount compared with the Consumer Staples Select Sector SPDR ETF (XLP) and S&P 500 Index’s (SPX-INDEX) current forward PE ratios of 20.9x  and 18.1x, respectively.

Still, despite the company’s low valuation, SJM stock doesn’t appear to be appealing to investors as an undervalued one. Simply put, an undervalued stock is one that is trading at a lower price relative to its earnings or other fundamental metrics including sales, book value, or cash flow.

J.M. Smucker’s fundamentals don’t appear excellent as it has been struggling with sales and earnings, and a trend reversal doesn’t look to be in the cards. The company reported back-to-back sluggish results, and future earnings are likely to remain pressured in coming quarters.

Notably, the forward PE valuation multiple tends to differ among peers, based factors like capital structure and future earnings growth rate.

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Low growth expectation

SJM’s long-term EPS (earnings per share) growth rate stands close to 7%, which is well below what Kraft Heinz (KHC), Hershey (HSY), Mondelēz (MDLZ), McCormick (MKC), and Conagra Brands (CAG) offer. Meanwhile, in the near-term, SJM is likely to disappoint on sales and profitability.

SJM’s management expects sales and EPS to remain low as the industry-wide weakness is likely to take a toll on its financials. The company’s soft sales, reduced profits in the coffee segment due to unfavorable pricing, higher promotional and marketing spending, and increased commodity costs are all expected to offset positives stemming from productivity and cost-saving measures.


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