Smucker seen as promising but pricey

by Josh Sosland
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NEW YORK — While describing the J.M. Smucker Co. as a “high quality company that deserves to be a core holding” in its space, Credit Suisse is not yet ready to recommend investment in the Orrville, Ohio-based packaged foods company.

Initiating investment coverage with a “neutral” rating, Robert Moskow, a Credit Suisse research analyst, advised investors to “wait for a better entry point” given a market opinion of Smucker that is “already so high.”

Mr. Moskow identified three reasons for approaching Smucker with caution:

1)       Weak market share trends in its major categories

2)       Questions about the sustainability of benefits from falling input costs

3)       A “plethora of buy ratings” already inflating the stock price.

Over the last 52 weeks, Smucker has lost market share in four of its five largest categories, Mr. Moskow said. These include coffee, down 3.6%; peanut butter, up 0.2%; fruit spreads, down 0.3%; oil and shortening, down 0.5%; and baking mixes and frostings, down 0.4%.

In his analysis, Mr. Moskow focused on coffee, Smucker’s largest business segment accounting for about 40% of sales and 50% of operating profits.

“We view Kraft as Smucker’s closest peer because its brands compete most closely with Folgers in terms of price and quality,” Mr. Moskow said. “Kraft had been an easy target for Smucker up to now.”

This situation may be changing with coffee now part of a smaller Kraft Foods Group and with its Maxwell House “perceived as antiquated” by consumers.

“Kraft management reversed the momentum on coffee this year after it separated from its parent company Mondelēz and started making coffee a strategic priority,” Mr. Moskow said.

Discussing concern about pricing trends in coffee, Mr. Moskow acknowledged that in recent years Smucker has successfully implemented controlled price cuts in response to falling input costs.

While Wall Street appeared unconcerned by these price moves, the next cut may be viewed differently, Mr. Moskow said.

“We think the stock would come under pressure because it 1) comes at a time of weaker food category dynamics and 2) would be seen as a defensive response to market share losses and as a significant reduction in management's earnings flexibility,” he said.

Mr. Moskow added, “While Smucker is certain to enjoy a fair degree of gross margin expansion from commodity deflation over the next two to three quarters, we think the market overestimates the sustainability of these commodity benefits.”

Commenting on investment enthusiasm he already believes is excessive, Mr. Moskow said analysts, in addition to their “buy” ratings, have been raising earnings estimates for Smucker.

“Consensus estimates are already above management’s guidance, implying that the stock is baking in a best-case scenario,” he said. “With sentiment so high, we recommend waiting for a better entry point.”
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