EUR 850.00 For Business Accounts Only

Morningstar | No-Moat Smucker Posts Uninspiring Fourth Quarter; Shares Appear Rich

After no-moat Smucker’s fourth quarter (flat organic revenue and 100-basis-point drop in adjusted operating margin) we do not expect to make a material change to our $101 fair value estimate. We continue to view shares as rich. Fiscal 2019 results were largely as we expected, with revenue growth a bit light (flat organically compared with our expectation for 0.5% growth), while 19.0% adjusted operating margins came in better than our 17.9% estimate, driven by lower overhead expenses.

Smucker issued fiscal 2020 guidance for revenue growth of 1% to 2% (in line with our 1.6% estimate) and EPS growth of 2% to 4% (in line with our 3.3%). However, earnings guidance is slightly lower than the 3% to 4% management discussed previously. The firm cited uncertainty with tariffs, and we expect it is also more cautious on pet food margins, as protein prices have been climbing (and we expect them to continue to climb, given China’s outbreak of African Swine Fever) and Smucker admits it follows on pet food prices, as opposed to leading them, which leaves it vulnerable to margin pressure.

We applaud the firm’s increased investments in marketing to 6.9% of revenue in fiscal 2019 from 5.7% to 5.8% the previous three years. We expect this will help stabilize market share over the long term, but we think patience will be required. Despite portfolio improvements, Smucker is still overexposed to the weak subsegments of its categories and underexposed to the high-growth areas, such as single-serve coffee and super-premium pet food. The quarter provided evidence that progress will be choppy. Share losses in the pet segment (37% of sales) continued, with organic revenue down 1.6%. Management cited a delay in new product launches, which shifted from the fourth quarter into the first. We believe the newly acquired Nutrish premium brand enhances Smucker’s positioning in pet and expect better performance in fiscal 2020, although we expect continued headwinds in super-premium.

The coffee segment (27% of sales) surpassed our expectations, with 3.6% revenue growth, as volume growth more than offset price declines. The firm continues to see strong growth in the Dunkin’ Donuts and Café Bustelo brands and is pleased with the launch of 1850, which is now experiencing improved trial rates after a slow start. Although Smucker is expanding its presence in premium and single-serve, the high-growth drivers of the coffee category (representing 66% of category revenue) these segments only represent 39% of Smucker’s coffee business, and as such, we expect Smucker will struggle to maintain share.

Fourth-quarter organic revenue for consumer foods (22% of sales) were flat, as higher volumes fully offset lower prices. Smucker is experiencing high growth rates in its snacking brands, Uncrustables and Jif Power-Ups, however, these products represent a small portion of the segment, which is dominated by fruit spread, peanut butter, and shortening, categories experiencing pricing pressure. But as snacks become a larger portion of the segment over time, we expect revenue to accelerate from fiscal 2019’s 1% growth to 2.5% over the long term.