Weak organic sales and margin decline
J.M. Smucker (SJM) is expected to announce its results for the second quarter of fiscal 2019 on November 28. Analysts expect J.M. Smucker’s top and bottom line to sustain the momentum in the second quarter due to the Ainsworth acquisition and a decline in the effective tax rate. However, organic sales could remain soft, which reflects lower pricing and weakness in the Folgers brand.
The favorable cost trend, like lower green coffee costs, is expected to support the company’s margins. However, higher packaging and freight costs could continue to remain a drag and hurt J.M. Smucker’s margins. Meanwhile, increased interest expenses driven by borrowing costs related to the Ainsworth acquisition will likely hurt J.M. Smucker’s bottom-line growth.
Packaged food companies in North America have acquired fast-growing brands to accelerate their top-line growth as the demand for packaged foods remains low. The rise in interest expenses, driven by higher debt taken to fund acquisitions, is taking a toll on the companies’ profitability growth rate.
Overall, analysts expect J.M. Smucker’s net sales and EPS growth rate to remain strong. However, weak organic sales and sluggish margins could restrict the upside in the stock.
So far this year, J.M. Smucker shares have underperformed the broader markets (SPY). Meanwhile, stocks of other major packaged food companies have eroded a significant amount of value.
J.M. Smucker stock has fallen 10.9% on a YTD (year-to-date) basis as of November 23. During the same period, the S&P 500 Index has decreased 1.5%. In comparison, shares of General Mills (GIS), Kraft Heinz (KHC), Kellogg (K), Conagra Brands (CAG), and Campbell Soup (CPB) have fallen 26.9%, 34.4%, 9.2%, 11.9%, and 15.8%, respectively on a YTD basis.