NEW YORK — Research analysts with Credit Suisse see J.M. Smucker Co. as a “fallen star” stock that has lost the confidence of the market but has the potential for a near-term turnaround. Credit Suisse said it still harbors some concerns about integration risk with the recently acquired Big Heart pet food business, but it has seen noticeable progress in the Orrville, Ohio-based company’s coffee business.
Credit Suisse upgraded J.M. Smucker to outperform from neutral with a price target of $125 (up from $112).
|Robert Moskow, a research analyst with Credit Suisse.
“We view the risk/reward profile of Smucker’s coffee business in a much more favorable light than when we launched coverage on Smucker two years ago,” said Robert Moskow, a research analyst with Credit Suisse. “At the time, we feared that Smucker was overearning in coffee and that profit margins would fall as Kraft increased its competitive intensity and Smucker’s brands struggled to compete in the K-cup segment.”
Those fears played out in fiscal 2015 when Folgers pushed its price premium to Maxwell House too high and volume fell 10%, Mr. Moskow said. As a result, Smucker’s profit margins declined to 26.5% from a peak of 29.6%.
But Mr. Moskow said Credit Suisse has less to worry about now after Smucker’s management team re-based margins and lowered expectations to mid-single digit profit growth in fiscal 2016. According to data from Nielsen, Smucker’s coffee sales were up nearly 6% in the past 12 weeks with Folgers up 0.5% and K-cup sales up 33% behind the launch of Dunkin K-cups.
“We expect volume trends to remain strong the rest of the year as K-cups maintain momentum, the company transitions Folgers to a smaller can with a lower price point to compete more effectively with Maxwell House, and pricing falls to accommodate lower green coffee costs,” Mr. Moskow noted in the report.
He said Smucker’s competitive advantages in packaged coffee remain intact, with a 30% market share, a cost-advantaged supply chain, and a strong stable of brands covering all of the important price points in the market.
“Retailers still depend on Smucker for category management and price leadership,” he said.
Mr. Moskow cited two other reasons for optimism in the coffee category.
First, he said 3G Capital’s acquisition of Kraft improves the pricing power of the category.
“As was the case with Heinz, 3G tends to walk away from unprofitable trade promotion deals,” he said. “If 3G cuts promotional spending in the category, the profit pool for the category will expand.”
Second, JAB Holding Co.’s involvement in the coffee category increases the probability of broader consolidation in the category and supports high valuation multiples in the space, Mr. Moskow said.Shares of J.M. Smucker closed at $108.97 on Aug. 18 after opening at $109.02 and reaching a high of $110.13.