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What’s Hurting SJM Stock despite Solid Sales and EPS Growth?

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Recent performance

The J.M. Smucker Company (SJM) reported strong net sales and earnings in its last reported quarter. The company’s acquisition of Ainsworth significantly boosted its net sales growth rate. Meanwhile, its adjusted earnings jumped 17.9% year-over-year driven by a substantial fall in the effective tax rate.

Despite the company’s impressive performance, its stock is down 11.1% year-to-date as of September 18. Continued weakness in its base business is taking a toll on its organic sales growth. Meanwhile, higher packaging and transportation costs and increased interest costs are adversely affecting its bottom line.

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Outlook

J.M. Smucker’s top line is likely to benefit from its Ainsworth acquisition in the coming quarters. However, its underlying business is expected to remain weak, with lower net pricing in the coffee, oil, and pet food categories.

Analysts expect J.M. Smucker’s margins to remain soft as higher packaging and transportation costs coupled with lower net pricing are likely to more than offset the benefits of its lower green coffee costs. Moreover, analysts expect the company’s EPS growth rate to slow sequentially due to increased interest expenses on higher debt related to the funding of its Ainsworth acquisition.

Higher interest expenses related to the funding of their recent acquisitions are hurting the EPS growths of other packaged food companies too. Analysts expect the Campbell Soup Company’s (CPB) and General Mills’ (GIS) adjusted EPS to remain subdued in the near term owing to their elevated debt positions.

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