J.M. Smucker (SJM, Financial) reported weak set of numbers for the second quarter as sales declined on account of a weak coffee business. Although its earnings rose due to lower overall costs and expenses, yet it failed to match the street expectations. But the company has strong fundamentals and the higher coffee prices, which weighed on its performance during the quarter, will eventually subside putting the company back on the growth trajectory in the days ahead.
Improving traction
If we look at statistics in the past years, coffee brands such as Folgers have grown significantly in eight of the past nine quarters. On the back of these data’s the management is highly optimistic for its future coffee business. Not only this, but Smucker remains the overall leader in the coffee category with a wide market share advantage and is one of the leaders in setting consumer trends. Also it is well on track to tap the growth, which is expected to come from K-Cup and premium segments including Dunkin Donuts.
But the path may not be as easy as it seems to be since the challenges are on a macro level rather than just the industry. Lately, the trend in edible items has been changing as consumers become more health conscience. Along with this, the traditional techniques for promotion are proving to be less efficient, mounting further pressure on its business. However, in the wake of these headwinds the management continues to focus on innovation to come up with products that are consistent with evolving consumer trends.
Moreover, the company saw improving trends in its international food service and natural foods, which reported sequential growth. In Canada, it achieved market share gains across all its categories including expectations for a strong conclusion to the fall bake period. Also with changes in the USDA program it will be able to manufacture the peanut butter used in the sandwiches, which is expected to benefit retail sales by fiscal 2016.
Conclusion
Although in the near term these headwinds might indeed weigh on its financials. For the entire year Smucker anticipates its sales to decline 1% from its earlier estimate of 3% to 4%. It has a trailing P/E of 18.65 compared to the industry P/E of 22.7 and its forward P/E seems even more attractive at 17.21. If we consider its prospects from a long term perspective the stock could have significant upside in the future.
