The J. M. Smucker Company

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

The J.M. Smucker Company (SJM) is a leading manufacturer and marketer of food and beverage products, primarily operating in the North American market. The company’s portfolio consists of brands across categories like coffee, pet food, and consumer foods.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: The J. M. Smucker Company, or SJM, operates within the consumer-packaged goods industry, producing and marketing a diverse range of food and beverage products. They are particularly known for their brands in the coffee, pet food, and consumer foods sectors.

  • Core Business Segments:
    • U.S. Retail Coffee: This segment is the company’s largest and includes well-known brands like Folgers, Dunkin’, and Café Bustelo. They sell branded coffee for at-home use through various retail channels.
    • U.S. Retail Pet Foods: SJM has a significant presence in the pet food market with brands like Meow Mix, Milk-Bone, and Pup-Peroni. This segment primarily caters to the US market and is a significant driver of revenue.
    • U.S. Retail Consumer Foods: This segment includes a diverse portfolio of products, such as Smucker’s jams, Jif peanut butter, and Crisco cooking oil. These products are sold through retail channels primarily in North America.
    • International and Away From Home: This segment includes brands with a focus on providing products to customers outside of the US market and those who operate food service businesses
    • Other - The other section is primarily the sale of flour and baking products through baking brands
  • Revenue Distribution:
    • SJM derives most of its revenue from the U.S. market, with a notable focus on consumer goods.
    • Their International and Away From Home segment accounts for the remainder of the revenue.
    • The company’s geographic focus is primarily North America and the remaining revenue is from international markets, with operations spanning a range of countries.

The company has been selling some of it’s higher multiple businesses while also buying others. These are usually brand related businesses and have been changing a few times recently.

Industry Trends and Competitive Landscape: * Intense Competition: The consumer packaged goods industry is characterized by fierce competition among major brands and private labels, with consumers being increasingly price-sensitive. * Evolving Consumer Preferences: Health and wellness trends are shaping consumer preferences, impacting demand for healthier product options. This is evident in the company’s recent innovation pipeline, with focus on healthier ingredients and sugar reduction. * Supply Chain Challenges: The food industry is facing supply chain disruption due to geopolitical conditions * Inflation: High inflation and cost increases of inputs is another difficulty the company is facing

*   **Competitive Dynamics:** 
    *   SJM faces competition from large established brands as well as from private-label manufacturers.
    *   They have to balance prices against maintaining brand loyalty and customer value. This can prove challenging in a competitive landscape.
    *   They compete with other companies that are more agile and adaptable to consumer trends.

What Makes SJM Different?: * Strong Brand Portfolio: SJM has a long history of owning and acquiring strong consumer brands with high recognition. However, these advantages do not guarantee high profits, they only increase customer willingness to pay. * Distribution Network: They have a large distribution network which is critical to their food-based businesses, enabling them to reach consumers through various channels.

  • Scale: The company has a large scale which creates a cost advantage. They have invested heavily in automation in order to make up for increasing labor costs, and to lower overall costs.

Financial Analysis * Consistency: The company typically has stable revenue growth. * Profitability: SJM’s profitability is sensitive to input costs. * Debt: SJM’s debt is relatively stable, but it has been increasing due to recent acquisitions

  • Latest Financial Performance (First Quarter of 2023-2024):
    • The company’s net sales increased by 12% due to price increases, with a decline in volume of 4%.
    • Adjusted earnings per share increased to $2.27, up 43%
    • Gross profit margin was down by 2.6 points but operating profit margin increased by .7 points to 11.9%.
    • They also raised their guidance for the year after the impressive results.

Moat Rating: 3/5 * Narrow Moat: SJM possesses a narrow economic moat primarily due to its strong brand portfolio, widespread distribution network, and, for some brands, a scale advantage. Brands like Folgers and Jif have a long history and a large customer base, while their distribution network allows them to efficiently reach consumers. * The moats, however, are not as durable as we would like. Competition is intense and consumer preferences often change quickly. The company does not have the pricing power that would allow it to pass on the higher costs without damaging the value.

  • While the company is capable of generating excess returns on capital, the degree to which it can grow sustainably at high rates is constrained by competition and pricing issues, thus the moat is not “wide”. They can not raise prices as high as they want, and their scale and costs structure is not hard enough to reproduce.
  • Their revenue growth, though present, is not high and their ROIC, although respectable, does not scream “outstanding”, indicating a moderate competitive advantage.

Risks to the Moat and Business Resilience:

*   **Competition from Private Labels:** The rise of private labels, which are lower-cost alternatives, threatens the pricing power of SJM's branded products. This also reduces overall margins.
*   **Commodity Price Volatility**: Prices of raw materials, such as coffee beans, peanuts, and oil, can fluctuate significantly, impacting SJM's profitability. High raw-material costs affect their input costs.
*  **Debt**: In order to support the recent acquisitions and expansions, the company has taken on considerable debt, which could be concerning should their business start underperforming.    *   **Shifting Consumer Trends:**  Changes in consumer preferences and demand, such as greater interest in healthier foods, may reduce the appeal of some of the company's existing products.
*   **Economic Downturn**: Changes in the economy, might negatively impact the demand for their products. Consumers might choose cheaper alternatives, such as private-label products or less expensive food options, in such scenarios.
*   **Acquisition Risk:** A large portion of SJM's growth has come from acquisitions, meaning integration challenges and overpaying in the process is always a risk.   *    **Supply Chain Disruption**: Any disruption in the global supply chain can dramatically affect the company's profits.

Understandability: 2/5 While the overall concept of a consumer packaged goods company is easy to grasp, SJM’s wide range of products, brand portfolio, and the interdependencies between segments make it difficult to understand for an average person. This is also compounded by the recent acquisitions that the company is making. The company is difficult to understand fully without putting in significant effort.

Balance Sheet Health: 4/5 * SJM’s debt is relatively high, but its cash flows and strong profitability means that it is not a significant concern in the immediate future. * Their cash holdings are reasonable and allow for strategic investment and future acquisitions. * Their current ratio and other quick-liquidity measures indicate that they have a manageable amount of debt relative to short-term liquid assets.

Recent Concerns and Management Outlook:

  • In their latest earnings call, the management addressed supply chain concerns by claiming their new system is better designed than those of their peers.
  • They also discussed the strength of their brands and the resilience of their business through recessionary periods.
  • They discussed pricing power and their ability to pass on input costs, but acknowledged that at one point their profits will be reduced.
  • They are working hard on increasing efficiency, with automation being a major part of this. They claimed that their acquisitions were well performing and that the company’s direction is to be an acquisition focused one.