Not Peanut Butter Jelly Time For JM Smucker

"Where he at? Where he at? There he go! There he go!" - Peanut Butter Jelly Time 

The "he" in the song could definitely be a reference to the earnings at JM Smucker (NYSE: SJM), after the company missed estimates earlier today. The Orrville, OH-based company reported a decline in its second quarter earnings, and shares are down around 1% as of the time of this article. Excluding one time items, the company reported $1.29 per share on $1.5 billion in revenue, while Wall Street was expecting earnings of $1.39 per share on $1.5 billion in revenue. In addition, the company expects full year earnings below the Wall Street consensus. JM Smucker now expects to earn $4.90 to $5 per share for the full year, well below expectations of $5.11 per share. "We delivered record sales growth in the quarter including robust contributions from product innovation such as our K-Cups® and seasonal offerings. As we head into the key holiday period, our strong leading brands are trusted and remain well positioned to meet the varying needs of our consumers, including helping to bring their families together to share memorable meals and moments," commented Richard Smucker, Chief Executive Officer. "Additionally, we are effectively managing this period of significant cost inflation, where our cost of goods sold increased approximately 30 percent for the quarter, yet, we posted gross profit growth. As always, our focus remains on effectively managing the balance between volume, market share, and profitability, while continuing to invest in our brands."

On the conference call, there was some concern about the company's peanut supply, especially as costs soared earlier this year. The company said that it is "comfortable" with its peanut supply, and that price increases are a thing of the past, as commodity costs have been going down. Earlier this year, peanut butter prices soared on a shortage of available crops, forcing suppliers such as JM Smucker and others to raise prices. While the earnings have no doubt been hit by the rising input costs, the company did say that most of the rising costs in peanuts is expected to be recognized in the fourth quarter, so this is something that bears watching in the upcoming quarter. Given these pressures, gross margins dropped sharply year over year, falling from 38.7% in 2010 to 32.9% in 2011.

One area the company can experience growth in is the K-Cup business, especially as Green Mountain Coffee Roasters (NASDAQ: GMCR) loses patent protection in 2012. Green Mountain has come under much scrutiny in recent weeks as David Einhorn announced a short position in the name back in October. The company said that net sales in the U.S. retail coffee segment jumped 29% in the second quarter of FY2012, thanks in part to price increases. One line in the earnings release is important for signaling growth in the future: "Contributing to favorable sales mix in the second quarter of 2012, net sales of Folgers Gourmet Selections® and Millstone® K-Cups®, increased $29.8 million, compared to the second quarter of 2011, also representing 6 percentage points of segment net sales growth.." If JM Smucker can capture meaningful market share in the K-Cup market, this could be a huge growth driver for the company in the years to come. Deutsche Bank was very positive on the name going into earnings earlier in the week, writing, "Elasticity remains a challenge for all food companies, but we continue to recommend Smucker's stock based on a relatively low C2012E valuation (12.7x adj P/E), strong balance sheet, solid FCF (5% yield) and leading brands that continue to gain share across the bulk of the U.S. based portfolio." It may not be peanut butter jelly time this quarter or the next, but as input costs come down, it might be time to turn up the beat again.

ACTION ITEMS:

Bullish:
Traders who believe that input costs will continue to come down might want to consider the following trades: Smucker is cheap at these levels, trading at 13 times expected 2012 earnings, and it also has a 2.6% dividend yield to support the share price.

Traders who believe that input costs will rise as the world's population grows may consider alternate positions: This could hurt other consumer staple companies like Kraft (NYSE: KFT), Heinz (NYSE: HNZ), as well as Smucker. Consider shorting these names.

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