25 Jun

Why J.M. Smucker’s High Valuation and Low Growth Could Hurt It


Stock performance

Shares of the J.M. Smucker Company (SJM) are up 29.8% YTD (year-to-date) as of June 24 and have outperformed the broader markets. The company’s acquisition of Ainsworth Pet Nutrition and its focus on high-growth categories via its divestiture of underperforming brands have supported its stock so far this year. Moreover, favorable green coffee cost trends and a lower effective tax rate have driven its earnings and, in turn, its stock price.

Acceleration in sales growth driven by acquisitions and a focus on high-growth categories has supported the stock prices of the majority of packaged food companies so far this year. The shares of Conagra Brands (CAG), General Mills (GIS), the Campbell Soup Company (CPB), and the Hershey Company (HSY) are up 31.6%, 37.8%, 22.9%, and 28.2%, respectively. Meanwhile, robust organic sales and the expansion of its snacking portfolio have driven Mondelēz International’s (MDLZ) returns.

Why J.M. Smucker’s High Valuation and Low Growth Could Hurt It

Is a pullback around the corner?

We’re impressed with J.M. Smucker’s financial performance over the past several quarters and the company’s strategy of focusing on high-growth categories. The strength in its growth brands, including Nutrish, Café Bustelo, and Dunkin’, is also encouraging.

However, we expect J.M. Smucker’s sales growth rate to remain low in fiscal 2020. Lower net price realizations and tough comparisons are expected to limit its sales growth. Meanwhile, soft sales and higher manufacturing costs are expected to hurt the company’s earnings.

J.M. Smucker stock is trading at 14.3 times its fiscal 2020 estimated EPS of $8.50 and 13.8 times its fiscal 2021 estimated EPS of $8.82—both of which look expensive based on its projected EPS rises of 3% and 4%, respectively, in fiscals 2020 and 2021.

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