J.M. Smucker Falls 9% After Earnings; Is It An Opportunity?

J.M. Smucker

released its quarterly earnings results on Thursday prior to the opening bell. The company missed Wall Street earnings and revenue estimates and lowered its forward looking guidance - not a good combination. As a result, SJM shares are getting punished on Thursday, falling 9.40% to $70.79 on heavy volume. While the near-term outlook appears gloomy, long-term value oriented investors may find opportunity in Smucker on a further pullback. For the fiscal third quarter, SJM reported net income of $116.84 million or $1.03 per share, compared to $132 million or $1.11 per share, in the year ago period. On an adjusted basis, which is comparable to analysts' consensus, SJM reported EPS of $1.22 versus $1.27 in last year's third quarter. This missed Street consensus EPS estimates of $1.41. Net sales at the company were up 12% to $1.47 billion but came in below Wall Street expectations of $1.54 billion. Gross margins for the quarter fell to 31.7% versus 36.1% last year. As a result of lower demand for SJM's products and rising costs, the company also cut its full-year guidance. Smucker now sees adjusted earnings per share between $4.60 and $4.65 versus previous guidance of $4.90 to $5.00. Sales are still expected to grow in the mid-teens to $5.5 billion. Currently, the Street is projecting fiscal 2012 EPS of $5.02 on revenue of $5.65 billion, so the company's updated guidance was certainly a disappointment which is being reflected in the stock. "Despite having strong merchandising programs in place for the holiday period, our volume was lower than expected as a result of our higher price points coupled with lower consumer demand across the food industry," President and Chief Operating Officer Vince Byrd said in a statement. It would appear that Smucker is being squeezed by the same phenomenon that is affecting other food companies. Namely, demand for premium, higher priced, food items remains relatively stagnant amid a weak economy, while input costs are rising. While this could continue to weigh on the shares in the near-term, the situation does provide a catalyst for Smucker in the case of an improving economy. In the meantime, Smucker has a number of attractive qualities that should encourage investors to be patient while waiting for demand to pick up. First, over the years, Smucker has built a portfolio of established, high-quality food brands. These include, Crisco, Folgers Coffee, Jif peanut butter, Pillsbury, and of course the Smuckers brand, among others. This is a very high quality business with an impressive stable of consumer brands. Furthermore, SJM has a long-term track record of creating shareholder value. Over the last 5 years, the stock is up roughly 44% and during the last 10 years it has appreciated 111%. While these returns are not phenomenal, they have far outpaced the S&P 500. Equally important is SJM's track record of increasing its dividend payments, which have risen from $0.16 per quarter to $0.48 per quarter in ten years time. The company suspended its dividend for one quarter during the heart of the financial crisis. At current levels, the stock is yielding a very healthy 2.40%. Valuation also looks compelling on an earnings basis, although revenue growth will be a key. The stock trades at a trailing P/E of 17.55 and a forward P/E of 12.65. The company's PEG ratio of 2.03 appears high, but is offset by the company's solid dividend and high quality business. Furthermore, if SJM can outpace current growth projections over the next five years, today's PEG ratio will not look expensive in hindsight. The primary concern for investors should be SJM's slowing revenue growth. The company experienced excellent top-line growth coming out of the financial crisis, but that has now moderated. Revenues grew from $2.524 billion at the end of fiscal 2008 to $4.605 billion at the end of fiscal 2010. In fiscal 2011, however, revenues only increased $220 million year over year while earnings fell slightly as a result of higher costs. The hope for SJM shareholders going forward is that the economy continues to improve, thereby boosting demand for its higher priced food items. Lower costs triggered by a moderation in input inflation would also benefit SJM. The pessimism that is likely to surround SJM in the coming months after its disappointing earnings results and guidance cut may give value oriented investors who like the name an opportunity to build a position. After Thursday's sell-off, SJM is now trading well below its 50-day moving average at $79.13 and its 200-day moving average at $75.51. A market correction combined with lingering disappointment about the company's third quarter could catalyze a deeper pullback into the mid-$60 range which would be an attractive area to accumulate shares for a long-term investment.