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Smucker (SJM) Up 3.6% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Smucker (SJM - Free Report) . Shares have added about 3.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Smucker due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Smucker Misses on Q1 Earnings & Sales, Trims '19 View

J. M. Smucker reported first-quarter fiscal 2019 results, with earnings and sales improving year on year. Sales in the quarter were mainly driven by the Ainsworth acquisition. Additionally, some of the company’s key brands continued to perform well.

Nevertheless, the top and the bottom lines fell short of the Zacks Consensus Estimate in the reported quarter. Further, the company lowered fiscal 2019 outlook, to reflect impacts of the U.S. baking business divestiture.

Quarter in Detail

Adjusted earnings of $1.78 per share rose almost 18% year over year, but missed the Zacks Consensus Estimate of $1.81. The bottom line includes unfavorable impacts of 7 cents from accounting adjustments related to Ainsworth inventory.

Net sales of this Zacks Rank #3 (Hold) company increased close to 9% year over year to reach $1,902.5 million, driven mainly by the Ainsworth buyout. Notably, the acquisition contributed $162.8 million during the quarter. Nevertheless, sales missed the consensus estimate of $1,945 million.

Excluding the Ainsworth acquisition, the top line declined 1% due to lower net price realization across oil, coffee and pet food categories, somewhat compensated by higher net pricing in peanut butter.

Adjusted gross profit climbed approximately 8% to $700.2 million, whereas adjusted gross margin contracted 40 basis points (bps) to 36.8%. Adjusted operating income increased roughly 5% to $317.1 million, while adjusted operating margin declined 60 bps to 16.7%.

Segment Performance

U.S. Retail Coffee Market: The company's U.S. Retail Coffee Market segment sales came in at $489.5 million, which increased 2% from the prior-year quarter’s tally. This was backed by favorable volume/mix, primarily attributable to Dunkin' Donuts and Cafe Bustelo brands. However, the factors were somewhat countered by declines in the Folgers brand and ground coffee.

Segment profit jumped 12% to $147.8 million owing to lower input costs, somewhat negated by escalated marketing costs.  

U.S. Retail Consumer Foods:  Sales in the segment dipped 1% to $483.3 million. Excluding the baking business, net sales were flat year over year as gains stemming from volume/mix for Uncrustables and Smucker’s brands were partially countered by declines in Jif.

Segment profit fell 12% to $97.3 million due to increased freight and input costs, adverse volume/mix and higher marketing expenditures.

U.S. Retail Pet Foods: Net sales increased 29% to $671.2 million owing to contributions from the Ainsworth buyout. Excluding the impacts from this buyout, sales in the segment declined 2% due to lower net price realization and volume/mix.

Segment profit increased 3% to $100.4 million, supported by gains from Ainsworth. Excluding this buyout, profit in the segment declined due to unfavorable pricing and costs, partially offset by lower marketing expenses.

International and Away from Home: Net sales dipped 1% from the prior-year quarter’s tally to $258.5 million owing to lower net price realization. Segment profit rose 8% to $49.6 million, owing to reduced marketing expenses as well as benefits from reduced pricing and costs.

Financials

Smucker exited the quarter with cash and cash equivalents of $192 million, long-term debt of $6,184.9 million and total shareholders’ equity of $7,930.8 million. Cash flow from operations amounted to $243 million in the quarter, while the company generated free cash flow of $141.7 million.

Fiscal 2019 Outlook

The company is impressed with the performance of its pet foods business in the first quarter that gained from the Ainsworth acquisition, which in turn drove overall performance. Further, the company’s coffee business continued to perform well, backed by effective strategies. Smucker also remains on track with its cost-containment plans, directed toward expanding margins and support investments.

Further, management stated that the divestiture of U.S. baking business is expected to be completed by the end of August 2018, and expects net proceeds of $315 million. Further the company has lowered its fiscal 2019 sales and earnings view due to impacts of this divestiture.

Accordingly, the company expects net sales for fiscal 2019 at $8 billion, lower than its prior forecast of $8.3 billion. In addition to the impacts from the baking business divestiture, top-line projections were trimmed to reflect the lower-than-anticipated sales reported in the first quarter. Further, the company envisions fiscal 2019 earnings in the range of $8.40-$8.65, down from the prior view of $8.40-$8.65 per share.

Additionally, free cash flow is projected in the range of $770-$820 million compared with the earlier view of $800-$850 million, to reflect forgone profits connected with the divestiture. Capital expenditures are continued to be expected in the range of $350-$370 million in fiscal 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 7.58% due to these changes.

VGM Scores

At this time, Smucker has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Smucker has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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