J.M. Smucker Co Falls After Earnings, Is Now The Time To Buy?

A Mixed Bag For This Sweet Treat

The pandemic has been a blessing for the consumer staples segment. The move to stay at home as the manufacturers of consumer necessities, from food to healthcare, on the rise, and those trends are not expected to end soon. That said, as with all trends, not every company is seeing the same results. Take S.J. Smucker (SJM) for example, the company just smashed its consensus estimates for the quarter but provided weak guidance.

The guidance? The company is expecting full-year revenue to fall -1.0% to -2.0% despite the shift to stay-at-home food consumption. The reason is simple and highlights an issue faced by many in the business; while the stay-at-home segments of the business are booming the commercial eat-away segments aren’t. The news has the stock down more than 4.0% in the premarket and begs the questions, what does the guidance really mean for investors and is this a good time to buy the J.M. Smucker Company?

The Results Are Good, Don’t Get Discouraged Yet

Smucker’s fiscal Q4/calendar Q1 revenue grew 10% due to pantry-loading and stay-at-home trends. Volume and product mix contributed 11% to the top line, offset by a 1% decline in realized prices. The bottom line results also show growth in the double-digit range with adjusted EPS coming in $0.29 ahead of consensus. Bottom-line results were boosted by an increase in margins that added 210 basis points at the operating level.

The news that caught the market’s attention is guidance. The company is calling for a slight decline in full-year fiscal 2021 revenue but there is a mitigating factor. The fiscal year 2021 begins with the current quarter so this figure is a comp to the pandemic period. What this means is Smuckers is expecting to carry most of its pandemic boost through the next year and beyond.

What investors need to focus on is the future. While the eat-away business suffered greatly during the second quarter the rebound is already on. Restaurants around the country (and the world) are reopening, if slowly, and that will help support the core business. Add to that an expectation for stay-at-home strength to continue and the stage is set for this company to outperform its own guidance.

This 3.25% Yield Is Trading At A Deep Discount

Smuckers is a dividend payer and a good one. The company is yielding close to 3.25% with today’s decline and the payout is quite safe, even with the reduced guidance. The payout ratio with reduced guidance is a range of 42% to 45% and easily managed. The balance sheet is relatively unencumbered as well. There is some debt but mostly long-term and offset by low debt ratios and a strong cash position. Looking forward, based on the history of increases, an 18th dividend increase is expected and likely to come this quarter.

In terms of value, Smucker’s is trading in the 13X to 14X forward earnings range while its closer competitors are more richly valued. The closest comparisons are Conagra (CAG) and Tyson (TSN) in the 14X to 15X range while the group leader, Clorox (CLX), trades nearly 30X earnings. Others, like Proctor & Gamble (PG) and Pepsi (PEP), both trade in the mid-20s. The bottom line, there is room for an earnings-multiple expansion and, if you don’t get it, the yield will help make up the difference. J.M. Smucker is the highest-yielding of the bunch.

The Technical Outlook: Bullish But A Test Of Support Is In Progress

The technical outlook for SJM is bullish for the long-term although there are some hurdles in the nearer-term. The stock fell sharply in today’s action to test support and has yet to recover from the fall. The good news is that support is present at today’s low and buyers are actively stepping in to scoop up this bargain. Investors looking to get into this stock, either as a new or add-on position, should view today’s action as a buying opportunity.