The narrow-moat company faces a competitive onslaught in difficult categories, but it retains clout that constitutes a sustainable advantage.
While we plan a low- to mid-single-digit percentage cut for our $138 per share valuation for narrow-moat JM Smucker
after soft first-quarter earnings, our long-term outlook (calling for 3% sales growth and mid-teens adjusted operating margins, on average) is intact and we see the shares as attractive. We contend sentiment underestimates the continued relevance of the firm’s brands; although Smucker faces a competitive onslaught in difficult categories, we argue it retains clout that constitutes a sustainable (albeit diminishing) advantage.
Zain Akbari, CFA, is an equity analyst for Morningstar.
Smucker saw a 4% sales dip and a 17% adjusted operating margin for the quarter, versus our calls for a 3% sales uptick (including the pending Wesson purchase) and a 20% profitability mark for fiscal 2018. The firm updated its fiscal 2018 adjusted diluted EPS guidance to $7.75-$7.95 from $7.85-$8.05.
The coffee unit struggled in the quarter (sales down 6%, segment margin down 820 basis points) due to challenging competitive dynamics, with volume suffering until price cuts took effect in July. While input costs should ease and Smucker’s K-Cup economics should improve as a new agreement with Keurig Green Mountain takes effect, we anticipate segment margin will be hard-pressed to reach fiscal 2017’s 32.4%. Longer term, we expect deterioration into the high-20s as input costs normalize.
We are encouraged that the launch of Nature’s Recipe pet foods into the grocery and mass market channels has proceeded well, garnering a 3% share in the new venues six months after launch. As consumers look to traditional retailers for natural human food items, we anticipate the new offerings will capture some attention from shoppers who would otherwise look to pet specialty stores. Still, Smucker’s pet portfolio is split between premium and mainstream brands, the latter of which should be a share donor as the category premiumizes, leading us to hold our long-term segment margin forecast to around 20% (particularly as input costs normalize).
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