J.M. Smucker: Still A Bargain

by The Compound Investor

It has been a couple of years since J.M. Smucker (SJM) last featured on the site. I doubt the business requires a recap since there is hardly a soul in America who isn’t familiar with its products. After all, Ohio-based Smucker has a place in around 90% of the nation’s homes through ownership of brands like Jif peanut butter, Folgers Coffee and namesake Smucker’s jam. The cashflows associated with that activity tend to be nice and stable – and that makes the firm a top candidate for the buy-and-hold type folks that read the blog.

That last time I covered Smucker, I flagged two potential issues holding the stock back. The first was a perceived lack of growth; the second was the state its balance of sheet. In terms of the latter, I may have over-egged the pudding a little. Net debt stood at $6.5B back then, equivalent to around 6.5x annual free cash generation. Because Smucker is such as money spinner, it hasn’t taken long to get that number down. I have cumulative post-dividend free cash flow running at around $1.25B over the past couple of years. That helped push net debt down to around $5B at the end of the last quarter.

In terms of the growth issue, it is true that things have been quite slow in recent years. FY20 sales clocked in at around $7.8B (remember the firm runs a May-to-April fiscal calendar), which is exactly the same amount as it generated back in its FY16. Gross profit over that period basically flatlined at around $3B. Net income did actually grow by circa $70M, but that was largely thanks to the Tax Cuts and Jobs Act. Overall, there’s not a whole lot to write home about.

Cash Generation

With the above in mind, let’s stick to growth. The company expects net sales growth to clock in at 1% at the high-end this year, so basically flat compared to FY20. That actually represents an uptick on the circa 1.5% sales decline that management had previously anticipated. COVID-19 has obviously played its part there; sales were up circa 11% in the firm’s 1Q21 due to increased at-home consumption. Profit is expected to come in virtually flat year-on-year.

A couple of points make me sanguine about this. First of all, Smucker generates a bucket load of cash every year. I have cumulative cashflow from operating activities at around $10B over the past decade. The company spent $2.5B of that on CapEx – keeping its factories in good order and so on – and then another $3B or so on shareholder dividends. A quick glance at those numbers shows you that there is usually plenty of surplus cash reaching the corporate coffers each year.

At the moment, the company generates somewhere in the region of $950M in terms of its annual post-CapEx free cash flow. The dividend costs it around $400M or so each year, so that leaves around $550M for other purposes. That kind of firepower is obviously quite handy to possess in a lean spell. It can fund all kinds of things to boost earnings: acquisitions, buybacks, debt reduction, brand investments, and so on. In the meantime, you get to collect a pretty dependable 3.1% cash dividend too.

The second point is that Smucker stock looks cheap enough to compensate for its low-growth issues. I called it a bargain a couple of years back and not much has really changed. The shares currently trade for around $117 each, while management expects adjusted earnings per share to clock in at circa $8.40 this year. Let’s put the stock at just under 14x estimated FY21 profit per share. I can’t help but think that kind of valuation will work out just fine for long-term buy-and-hold folks.

Note

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