Morningstar | Despite Slow 2Q Sales, Our Outlook for Smucker Is Intact; Shares Attractive
With narrow-moat Smucker lagging our fiscal 2019 targets, our $126 fair value estimate should see a low- to mid-single-digit percentage dip after it posted second-quarter results. While we plan to temper our near-term outlook over transitory factors such as promotion timing and retailer shelf resets, our long-term take (low-single-digit growth, high-teens adjusted operating margins, on average, over the next 10 years) is intact. We believe the shares are attractive and contend that sentiment underestimates the strength of Smucker's brand portfolio (although we agree its clout is waning).Smucker saw 7% first-half sales growth and a flat adjusted operating margin (at 18.7%). Competitive pressure in coffee and peanut butter as well as high freight and legal costs led management to trim fiscal 2019 revenue guidance to $7.9 billion from $8 billion and cut its adjusted EPS target to $8-$8.20 (from $8.40-$8.65) versus our respective pre-announcement estimates of $8 billion and $8.36.
The coffee unit (near 30% of pro forma sales) saw mixed results as strength in on-trend brands (1850, Dunkin’ Donuts, Cafe Bustelo) was offset by pricing as lower input costs triggered more aggressive competition. Quarterly segment margin rose 440 basis points to 32% despite a 40% marketing expense increase (in service of the 1850 brand). Low input costs have driven near-term profitability (we still expect high-20s long-term segment margins), but Smucker will likely have to reinvest in its brands considering the competitive environment.
Pet food (near 40% of pro forma sales) remained sluggish as quarterly organic sales slid 1%, with profit margin falling 520 basis points to 17%. While the discontinuation of some Gravy Train items hindered sales, we are encouraged by Smucker's refocusing on higher-end labels. We believe strength in the premium Nutrish brand (up 23% for the quarter) is consistent with our view that such labels will support high-teens segment margins despite competition.
Smucker (J.M.) manufactures and markets food and beverage products. The company's principal products are coffee, dog food, pet snacks, cat food, peanut butter, fruit spreads, frozen handheld products, shortening and oils, portion control products, juices and beverages, and flour and baking ingredients. The company has four reportable segments: U.S. Retail Coffee, U.S. Retail Consumer Foods, and U.S. Retail Pet Foods, and International and Away From Home. The U.S. retail market segments represent the sales of food and beverage products to consumers through retail outlets in North America. The International and Away From Home segment represents sales outside of the U.S. retail market segments.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.