JM Smucker Earnings: Price Hikes Buoy Sales Growth Even as Volumes Tick Down; Shares Not a Bargain

Our $141 fair value estimate for no-moat JM Smucker SJM shouldn’t see a material change following fourth-quarter results. Organic sales popped 11%; while this was entirely driven by higher prices, we surmise flat volume against such pronounced pricing is commendable. However, we’re skeptical growth can hold at such lofty levels over a longer horizon, even following the sale of its lagging pet food business (which had accounted for 20% of sales). We see the benefit from focusing its resources on higher value stock-keeping units (like pet snacks and cat food, with the retention of Milk-Bone and Meow Mix, up 20% and 7%, respectively in the quarter). But competitive angst throughout the aisles in which it competes (coffee, pet, and spreads) is unlikely to remain dormant (as has been the case over the past three years) and could prompt Smucker to lower prices or risk market share losses, particularly as it plays in categories where lower-priced private-label fare has carved out a sizable presence (coffee, jam, peanut butter). This underpins our forecast for low-single-digit annual sales growth longer term.

From a profitability perspective, Smucker recorded a 230-basis-point jump in adjusted gross margin to 34.5% and a 100-basis-point increase in adjusted operating margin to 18.3%, as price increases and efforts to extract costs are offsetting the heightened costs (commodities, ingredients, and packaging) and supply chain pressures its faced (similar to peers). However, we don’t think Smucker is keen to keeping hiking prices with consumer spending weakening. Further, although we surmise it is working to unearth additional cost savings, stranded costs emulating from its pet sale could cap margins (with the bleed expect to linger into fiscal 2025). When taken together, we’re holding the line on our outlook for high-teens operating margins over the next 10 years. Even after a low-single-digit downdraft in shares, we don’t think investors should stock up.