JM Smucker: One Way To Play A Turnaround In Food Stocks

Many food stocks, especially J M Smucker Co SJM, have underperformed the broader market throughout 2017 for reasons including poor sales trends, slow growth prospects, changing consumer preferences and competitive issues.

The Analyst

Susquehanna Financial Group's Pablo Zuanic upgraded JM Smucker's stock rating from Neutral to Positive with a price target boosted from $110 to $127.

The Thesis

JM Smucker is the worst-performing stock under Zuanic's coverage and one of the most discounted on a tax-adjusted EBITDA basis, he said. (See Zuanic's track record here.)

But Smucker's coffee division is seeing improving trends — with robust pricing and expectations for lower coffee costs — as Arabica prices in November have dropped 22 percent from a year ago, Zuanic said.

The Orrville, Ohio-based company's pet food division has seen sales improvement and volume growth, and the company could capitalize on recent momentum by acquiring a natural pet food brand to add to its portfolio, the analyst said. 

Smucker's stock discount versus its peers does not reflect the fact that 70 percent of earnings come from the coffee and pet food segments, according to Susquehanna. Two-thirds of total sales come from coffee and pet food, which also implies the stock's discount to its peers is "excessive," the analyst said. 

Smucker's management may have set a low bar, which implies future earnings beats are "possible" in the near-term and any future guidance cuts are "unlikely," Zuanic said. 

Price Action

Shares of JM Smucker gained nearly 3 percent Monday morning but are still lower by more than 15 percent since the start of 2017.

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