Company Reports

Smucker has the leading brand in some categories, but we don’t think it enjoys pricing power or entrenched retailer relationships to create an economic moat. Its long-term strategy is to turn low-single-digit sales growth into mid-single-digit adjusted operating income growth, leading to high-single-digit adjusted EPS growth—but we expect mid-single-digit growth as likely.

Smucker has the leading brand in some categories, but we don’t think it enjoys pricing power or entrenched retailer relationships to create an economic moat. Its long-term strategy is to turn low-single-digit sales growth into mid-single-digit adjusted operating income growth, leading to high-single-digit adjusted EPS growth—but we expect mid-single-digit growth as likely.

On initial review of its (January-ended) fiscal third-quarter 2024 results, we expect to lower no-moat Smucker’s fair value estimate of $138 per share by a low-single-digit percentage, partially due to higher marketing spending and stranded costs from divested assets lingering longer than we thought. Over the past three months, shares have gained about 8%, far outpacing the single-digit-percentage losses for other packaged food companies we cover. Thus, we see more attractive upside in narrow-moat General Mills, which currently trades 17% below our fair value estimate.

Smucker has the leading brand in some categories, but we don’t think it enjoys pricing power or entrenched retailer relationships to create an economic moat. Its long-term strategy is to turn low-single-digit sales growth into mid-single-digit adjusted operating income growth, leading to high-single-digit adjusted EPS growth—but we expect mid-single-digit growth as likely.

We don't anticipate a material change to no-moat Smucker's fair value estimate of $140 per share based on its solid (October-ended) fiscal second-quarter 2024 results. Shares were up about 4% on the report, but had sold off more than 20% over the prior three months due to market concerns about intensifying competition among consumer-packaged-foods companies for stretched consumers' wallets. However, we think the negative sentiment was overdone and see attractive risk-adjusted upside to the continued growth of Uncrustables and integration of Hostess.

Smucker has the leading brand in some categories, but we don’t think it enjoys pricing power or entrenched retailer relationships to create an economic moat. Its long-term strategy is to turn low-single-digit sales growth into mid-single-digit adjusted operating income growth, leading to high-single-digit adjusted EPS growth—but we expect mid-single-digit growth as likely.

We don’t anticipate a material change to no-moat Smucker’s fair value estimate of $140 per share for the announced acquisition of Hostess Brands. We think Hostess' investors are the big winners. Hostess’ faster top-line growth, higher gross margin, strength in the convenience channel, and market-leading brands are attractive. However, we think Smucker paid a full price. The acquisition also adds execution and integration risk, which likely worries investors given Smucker’s past disappointments, driving shares down 7%. Even with the Sept. 11 decline, we don’t see much risk-adjusted upside at current prices.

Although Smucker has the leading brand in some categories, we don’t think it enjoys pricing power or entrenched retailer relationships to create an economic moat. Its long-term strategy is to turn low-single-digit sales growth into mid-single-digit adjusted operating income growth, leading to high-single-digit adjusted EPS growth—but we expect mid-single-digit adjusted EPS growth buoyed by share repurchases as likely.

We don’t anticipate a material change to Smucker’s fair value estimate of $140 per share or its no-moat rating based on first fiscal quarter 2024 results. Shares were up 2% on the solid start to the year and remain fairly valued, so we think investors should wait for a more attractive entry point.

After updating our forecasts, we trimmed our fair value estimate for Smucker to $140 from $141, which implies a 17 times 2024 adjusted EPS multiple and a 10.5 times enterprise value to 2024 adjusted EBITDA multiple. We forecast sales to decline 11% in 2024 reflecting divestments, growing about 3% per year thereafter. We expect operating margin to recover to 16% by midcycle from about 2% in fiscal 2023 as inflation headwinds subside. Shares trade near our fair value estimate at about $140 per share, so we think investors should wait for a more attractive entry point.

Although Smucker has the leading brand in some categories, we don’t think it enjoys pricing power or entrenched retailer relationships to create an economic moat. Its long-term strategy is to turn low-single-digit sales growth into mid-single-digit adjusted operating income growth, leading to high-single-digit adjusted EPS growth—but we see this as unlikely.

Our $141 fair value estimate for no-moat JM Smucker shouldn’t see a material change following fourth-quarter results. Organic sales popped 11%; while this was entirely driven by higher prices, we surmise flat volume against such pronounced pricing is commendable. However, we’re skeptical growth can hold at such lofty levels over a longer horizon, even following the sale of its lagging pet food business (which had accounted for 20% of sales). We see the benefit from focusing its resources on higher value stock-keeping units (like pet snacks and cat food, with the retention of Milk-Bone and Meow Mix, up 20% and 7%, respectively in the quarter). But competitive angst throughout the aisles in which it competes (coffee, pet, and spreads) is unlikely to remain dormant (as has been the case over the past three years) and could prompt Smucker to lower prices or risk market share losses, particularly as it plays in categories where lower-priced private-label fare has carved out a sizable presence (coffee, jam, peanut butter). This underpins our forecast for low-single-digit annual sales growth longer term.

Despite having leading positions in many categories (fruit spreads, peanut butter, dog treats, coffee, and cat food), we believe Smucker lacks an economic moat, either via its brand assets or entrenched retail relationships. Our analysis shows that for most of its sales base, Smucker does not possess pricing power, and its market shares have slipped. This dilemma cannot be attributed to a lack of support, as Smucker’s brand investments exceed that of its peers (with marketing, research, and development averaging 6.9% of sales the last three years versus 5.4% for peers). Rather, we suspect these expenditures are not as productive as its competitors, a problem not easily resolved.

We don’t expect a material change to our $139 fair value estimate for Smucker after digesting mixed third-quarter results, leaving shares a bit overvalued. Organic sales popped 11%, as a 15% benefit from pricing was partially offset by a 4% drawdown from volume and unfavorable mix. Management attributed this to a pullback in its premium coffee arm, as consumers seem to be selectively ratcheting back their spending by trading down to lower-priced fare. However, Smucker’s Uncrustables line (which caters to value-seeking consumers) remains a hero in its mix, with sales up 38% in the recent three-month period, on its way to $650 million in sales this year.

Despite having leading positions in many categories (fruit spreads, peanut butter, dog treats, coffee, and cat food), we believe Smucker lacks an economic moat, either via its brand assets or entrenched retail relationships. Our analysis shows that for most of its sales base, Smucker does not possess pricing power, and its market shares have slipped. This dilemma cannot be attributed to a lack of support, as Smucker’s brand investments exceed that of its peers (with marketing, research, and development averaging 6.9% of sales the last three years versus 5.4% for peers). Rather, we suspect these expenditures are not as productive as its competitors, a problem not easily resolved.

Smucker is ratcheting back its foray in the attractive pet space with the sale of several pet food brands and its private-label pet fare to Post for $1.2 billion, consisting of $700 million in cash and 5.39 million shares of Post—a transaction that provides further credence to our assessment management has been poor stewards of shareholder capital. The deal—which is slated to close by the end of April—essentially unwinds two of Smucker’s recent (and excessively expensive) transactions, Big Heart Pet Brands (brought into the fold in 2015 for $5.9 billion, or 13 times on an enterprise value/EBITDA basis) and Ainsworth (scooped up in 2018 for $1.9 billion, or 22 times before synergies and tax benefits). The combined brands being offloaded generate around $1.5 billion in sales annually (about 15%-20% of its consolidated total), but the price tag (0.8 times sales) speaks to the languishing prospects for offerings in the value and midstream segments, which have been losing share to premium and super-premium products.

Despite having leading positions in many categories (fruit spreads, peanut butter, dog treats, coffee, and cat food), we believe Smucker lacks an economic moat, either via its brand assets or entrenched retail relationships. Our analysis shows that for most of its sales base, Smucker does not possess pricing power, and its market shares have slipped. This dilemma cannot be attributed to a lack of support, as Smucker’s brand investments exceed that of its peers (with marketing and R&D averaging 6.9% of sales the last three years versus 5.4% for peers). Rather, we suspect these expenditures are not as productive as its competitors, a problem not easily resolved, in our view.

No-moat Smucker’s rhetoric at its Dec. 14 investor day suggests it understands the importance of consumer-valued product innovation, extending its media reach, enhancing its production and distribution capabilities, and unearthing cost savings. But, while the firm maintains market leadership positions by way of its Uncrustables brand, as well as within the pet snacks and cat food aisles (Milk-Bone and Meow Mix), and throughout its coffee portfolio (Folgers, Dunkin’, and Cafe Bustelo), its efforts have proven insufficient to unlocking an economic moat. We see some natural tailwinds that should manifest from increased on-the-go snacking, higher levels of pet ownership, and expanding its product set across price tiers. However, Smucker continues to direct more resources than some peers toward advertising as a percentage of sales on an annual basis (nearly 6% versus the 5% average by peers) but has yet to realize much in the way of outsize revenue growth relative to industry averages. Moreover, while we view the planned shift to increased spending on digital marketing as judicious, we don‘t believe this will be enough to jolt its trajectory either.

In its fiscal second quarter, Smucker reported 11% organic sales growth (a 17% boost from higher prices partially offset by a 6% drop in volume/mix), topping our 8% forecast. While Smucker’s meaningful exposure to value brands has resulted in market share losses in recent years as consumers traded up to premium offerings, we think this positioning is boosting Smucker’s performance in the current inflationary environment as consumers are more price sensitive. The firm touted that 71% of its sales in the U.S. retail channel are gaining or maintaining share, which we largely attribute to its value positioning. However, we continue to believe that Smucker’s brands largely lack brand equity, which underpins our no-moat rating.

Despite having leading positions in many categories (fruit spreads, peanut butter, dog treats, coffee, and cat food), we believe Smucker lacks an economic moat, either via its brand assets or entrenched retail relationships. Our analysis shows that for most of its sales base, Smucker does not possess pricing power, and its market shares have slipped. This dilemma cannot be attributed to a lack of support, as Smucker’s brand investments exceed that of its peers (with marketing and R&D averaging 6.9% of sales the last three years versus 5.4% for peers). Rather, we suspect these expenditures are not as productive as its competitors, a problem not easily resolved, in our view.