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Preserve Your Portfolio With Smucker's

By Will Ashworth

Tickers in this Article: GIS, SLE, CAG, SJM

The economy is teetering on the edge of a deep recession according to Warren Buffett. Investors looking for that rare recession-proof stock that will preserve your capital to fight another day might want to check out at a company I've admired for some time, partly because of its great sounding name. It's none other than J.M. Smucker Co. (NYSE:SJM), the Orrville, Ohio jams and jellies company. While food stocks are the flavor of the day, I think you'll find: With a name like Smucker's, it has to be good... a good investment that is.

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Who is Smucker's?
Jerome Monroe Smucker started the family business in 1897 making apple cider. Turning to apple butter in 1900, then finally jams and jellies in 1923. A Smucker has run the 110-year-old Ohio institution for five generations. Currently, Richard and Tim Smucker, who collectively own 8% of the stock, run the company. Since 2003, it has added products like Crisco cooking oils, Jif peanut butter, Bick's pickles, R.W. Knudsen Spritzers, Pillsbury baking products and Hungry Jack pancake mix. All great ingredients for a lunch or breakfast, the 15 acquisitions made in the past six years have transformed it into a food company from a simple jam business. It's changed its spots with success.

Growth By Acquisition
In the past five years, it's achieved exceptional results. The compound annual growth rate for sales was 27% (7% organically, the remainder from acquisitions) and 16% for earnings per share and the company doesn't plan to rest on its laurels. The corporate goal for the next five years is to grow sales 8% annually, half the growth coming from acquisitions and the other half from internal growth and new product introductions. It has a similar goal for earnings.

If it can find acquisitions like the four it bought between May 2007 and May 2008, it should have no problem reaching its goals. The first, and most important, was the purchase of the Eagle brand of condensed milk. This acquisition contributed almost half of the total company sales - $142.3 million - in the third quarter of fiscal 2008 alone. In addition, it acquired the Canadian Carnation canned milk brand from Nestlé, and estimates adding $50 million in annual sales; Europe's Best brand of frozen fruit and vegetables, adding $70 million in estimated annual sales; and the Knott’s Berry Farm brand of jams from Con Agra Foods (NYSE:CAG), adding another estimated $40 million in annual sales. Those four will add approximately $100 million to the top line in next year's third quarter alone. (For more on sales potential, see Great Expectations: Forecasting Sales Growth.)

Third Quarter Barn Burner
Well, let’s not get carried away. We are talking about a food company here, not some hitech business. Nonetheless, sales in Q3 2008 were healthy, even robust. Up 27% from $523.1 million last year to $665.4 million this year, net income was up $2 million or 5% to $42.4 million. Highlights of the quarter included: strong volume growth, good product testing with Jif nuts, a fourth consecutive quarter of sales growth for Pillsbury brand, share repurchases totaling $83 million and better-than-expected sales from Carnation. The future is bright. Furthermore, it's been able to pass on any inflationary cost increases to its customers with little resistance from them. It seems people can't get enough of peanut putter and jelly sandwiches!

How's The Valuation?
All three of price-to-sales, price-to-book and PEG ratios are below 2. When compared with industry competitors Sara Lee (NYSE:SLE), Con Agra Foods and General Mills (NYSE:GIS) you'll notice almost no difference between them in terms of valuation. What makes Smucker's special is its size. Here you have a company that is about one-fifth as big as the other three in market capitalization and revenues. This, in my opinion, gives it an advantage in that it's large enough to compete but small and nimble enough to maneuver in these tricky times.

The others have revenues around $13 billion each. Who are they going to buy (except each other) that will make a difference to the top and bottom lines? Smucker's, on the other hand, can continue to cherry pick the best small businesses available, transforming itself into a dominant player in the North American food business. I'll let you decide who presents the better value. (For more insight, read Finding Undiscovered Stocks and Use Price-To-Sales Ratios To Value Stocks.)

Bottom Line
I can't speak for Richard and Tim Smucker as to their ultimate goal for the business. While it does have a five-year transformational plan underway, I don’t believe it seeks to be the biggest food company in North America; just the best. On that front, it's doing an excellent job.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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