The J.M. Smucker Company (SJM): Why Peanut Butter & Coffee Is a Great Combo

The J.M. Smucker Company (NYSE:SJM)  saw its stock pushed down some 4% last week after releasing fiscal fourth-quarter earnings results. However, with Smucker’s leading position in the peanut butter and coffee markets, now could be a great buying opportunity. Many of Smucker’s products are consumer staples, but what’s more is that the company has a leading position in many its niche product markets.

First-quarter earnings came in above the Street’s estimates, with the company having earned some $1.22 per share versus the $0.93 from the same quarter last year and beating consensus estimates of $1.15. Yet, the sell-off in the stock comes as sales were down 1% due to lower prices for coffee and peanut butter. Also, Smucker offered fiscal 2014 EPS guidance of $5.65 to $5.75, which is near the low-end of analyst expectations of $5.73.

Vince Byrd, Smucker COO, did note that the company’s “strong brand building, innovation, and productivity initiatives with an ability to quickly adapt to market conditions has created a platform for growth.” The J.M. Smucker Company (NYSE:SJM) offers products that include include coffee, peanut butter, fruit spreads, shortening and oils, baking mixes and ready-to-spread frostings, and canned milk.

This strong brand that Smucker has created may finally be paying off. The company is now churning out a return on equity that’s the highest in 10 years.

The J.M. Smucker Company (NYSE:SJM)’s largest segment is the U.S. coffee market, which includes the Folgers brand. Last quarter, revenue from this segment expanded only 2% year-over-year, but the margins expanded some 520 basis points to 27.9%.

Key partnership

For its coffee segment, one of the long-term drivers should be the increasing demand for K-cups. Smucker has a key partnership with Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) for supplying Folgers and Millstone coffee brands in K-cups.

Green Mountain is the exclusive manufacturer of Smucker coffee branded K-cups, using roasted coffee beans provided by Smucker. Smucker expects to reach $300 million in K-cup sales during fiscal 2013, up 70% from 2012.

Smucker’s other major segment is U.S. retail consumer foods, which includes the Smucker’s, Crisco, JIF, Pillsbury and Hungry Jack brands. Innovation will be another key factor for Smucker, where, earlier this year the company introduced chocolate and mocha cappuccino flavors of JIF hazelnut spreads.

At the end of the 1Q there were only 22 hedge funds long Smucker; however, this was a 29% increase from the previous quarter. Ariel Investments has the largest position in Smucker, with a $60 million stake (check out Ariel’s top stocks).

Coffee market

One of Smucker’s biggest competitors in the coffee market is Green Mountain. Although the demand for K-cups is a long-term positive for The J.M. Smucker Company (NYSE:SJM), I believe it could be a headwind for Green Mountain, given the company’s over-reliance on this product.

After the run in with David Einhorn back in 2010 and Einhorn’s continued complaints about the company’s accounting, Green Mountain is still up 280% over the past 12 months. The company also recently upped its guidance for 2013 EPS to a range of $3.05 to $3.15, up from the prior guidance of $2.72 to $2.82.