EUR 850.00 For Business Accounts Only

Morningstar | Loss of Moat and Drop in Margins Drive a Lower FVE for Smucker; Shares Fairly Valued

Persistent secular headwinds have continued to plague Smucker’s businesses, eroding their brand intangible assets and strategic standing with retailers. As such, we revise the firm’s economic moat rating from narrow to none. Our fair value estimate falls to $101 from $126 as gross margins are squeezed by pricing pressure, higher brand investments are poised to ensue, and given we’ve shortened the time over which we forecast economic profits. In this vein, we still forecast sales growth of just less than 3% annually longer term, but now expect long-term gross margins approximating 37% (down from 38% prior) and operating margins of around 15% (down from 17%). Shares now strike us as fairly valued.

In the past, Smucker had demonstrated pricing power, evidence of a competitive advantage via brand intangible assets, in our view. However, GlobalData and recent company metrics highlight evidence that Smucker has lost relative pricing power in the past few years. The company has posted price declines across all segments at a surprising consistency. In the past three years, the company’s real pricing has averaged negative 0.6%, 70 basis points below the industry average across the packaged foods space and 30 points below the CPI’s food-at-home average. Another possible competitive advantage would be a strategic partnership with retailers, the result of possessing leadership positions in many important categories. Smucker does hold the number-one brand in fruit spreads, peanut butter, and dog treats, and the number-two brand in coffee and oils. However, we estimate that these categories represent only about 3% of food and beverage sales, not substantial enough to elevate the company to strategic partner status in our opinion.