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Smucker (SJM) Hits 52-Week Low: What's Hurting the Stock?

The J. M. Smucker Company SJM hit a 52-week low of $117.47 on Jun 30, closing at $118.33. Poor coffee volumes, unfavorable pricing and sluggish pet food sales have been weakening the revenues and earnings of this firm.

Additionally, a bearish near-term outlook provided during the fourth-quarter fiscal 2017 results has put pressure on the stock. This is well reflected in the company’s bearish share price movement for the last three months. 

Let’s delve deeper into the factors which have been affecting Smucker’s performance, in order to understand why its shares are performing dismally and whether there are any hopes of improvement.

Factors Impacting Performance

The U.S. Retail Coffee Market is Smucker’s biggest revenue generating segment. Of late, this segment has been battling with lower volume/mix due to reduced volume for the Folgers brand, as a result of escalating coffee costs. We note that Smucker’s performance is adversely affected by the highly volatile coffee prices which remain susceptible to aspects such as political decisions in coffee-producing countries, worldwide supply and demand, relative strength of the U.S. dollar, as well as speculative trading. A hike in coffee price leads the company to raise the pricing of its branded roast and ground coffee offerings, which thereby erodes its sales volume.

Smucker’s Pet Food business has been facing several challenges. Heightened competitive activity from more premium brands and challenges in dry dog food against a deflationary macro environment is weighing over the Kibbles 'n Bits brand’s performance. Sourcing challenges have also posed a concern in this segment.

The introduction of Nature's Recipe premium pet food in second-quarter fiscal 2017 is anticipated to stabilize the Kibbles 'n Bits brand, as well as benefit the entire dog food portfolio. However, the rest of the Pet Foods business’ top-line performance remains a concern. In fact, the company expects soft Pet Food sales in the near term. Smucker’s international business performance also remains under pressure due to currency headwinds.

Dismal Fourth-Quarter Results

Though Smucker posted better-than-expected earnings and revenues in the fiscal fourth quarter, the figures were down on a year-over-year basis. While earnings fell 19% year over year due to lower revenues and decline in gross profits, sales edged down 1% due to lower net price realization, mostly in the U.S. Retail Pet Foods segment, and unfavorable volume/mix in the U.S. Retail Coffee segment. However, this decline was partially offset by higher net pricing on coffee and fruit spreads. Lower volume/mix also pulled down gross margins of the company.

In addition, the company expects its earnings to decline due to softness in the coffee and pet foods segments, moving ahead. A lower volume and mix, and increased competitive activity in the pet foods segment are likely to dent Smucker’s bottom-line growth. Further, management expects elevated commodity costs, mainly in coffee, protein meals, and peanuts and oil, to constrain the company’s margins. Also, increased marketing spending to support product launches, like Nature’s Recipe, will take a toll on EPS growth.

Share Price Performance

We also observed that Smucker has underperformed the Zacks categorized Food–Miscellaneous/Diversified industry in the past three months. During the said time frame, the company’s shares fell approximately 9.5% compared to the industry’s decline of 3.8%.

Bottom Line

Smucker remains hopeful that its cost-reduction initiatives, combined with the restructuring and innovation related efforts, would improve the company’s performance in the near term. Furthermore, the company expects to gain from its strategic partnerships, over the long run. Nevertheless, headwinds such as unfavorable volume/mix and sluggish pet food sales are expected to thwart its performance, going ahead.

Smucker, which currently carries a Zacks Rank #3 (Hold), has a long-term growth rate of 7.3%.

Key picks

Some better-ranked stocks in the same sector are Constellation Brands, Inc. STZ, B&G Foods, Inc. BGS and Aramark ARMK, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Constellation Brands has an average positive earnings surprise of 11.7% for the past four quarters, with a long-term earnings growth rate of 17.8%.

B&G Foods delivered an average positive earnings surprise of 2.1% in the trailing four quarters and has a long-term earnings growth rate of 10%.

Aramark has an average positive earnings surprise of 4.5% for the last four quarters and has a long-term earnings growth rate of 12%. 

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