Editor’s Note: Related tickers: The J.M. Smucker Company (NYSE:SJM), Campbell Soup Company (NYSE:CPB), Kellogg Company (NYSE:K), ConAgra Foods, Inc. (NYSE:CAG), Mondelez International Inc (NASDAQ:MDLZ)
A filing with the SEC has disclosed that the wife of Timothy Smucker bought 1,000 shares of The J.M. Smucker Company (NYSE:SJM) on June 21st at an average price of $101.05 per share. Smucker is the chairman of the company’s Board of Directors- he owns over half a million shares of the company directly- and so this transaction had to be reported to the SEC as an insider purchase. We track insider purchases because these moves increase an individual’s exposure to the company, and so should signal more confidence than usual in the stock (otherwise it would be more rational to diversify). Studies do show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading). As such we like to briefly cover insider purchases so that investors can do further research on any interesting stocks.
The J.M. Smucker Company (NYSE:SJM)’s fiscal year ended in April 2013. The company recorded a 7% increase in sales compared to the previous fiscal year, and with margins improving its earnings grew by 18%. In fiscal Q4 the rise in net income was even stronger, but on the flipside this growth came entirely through margin improvements as sales actually fell 1%. Currently The J.M. Smucker Company (NYSE:SJM) trades at 20 times its trailing earnings; investors have been bidding up even fairly stagnant food companies into a similar valuation range, and even with analysts expecting further growth in EPS over the next two years the forward P/E is 16. Smucker is something of a defensive stock- its beta is 0.4- and while its pricing is high the company has at least shown some ability to grow its business.
Other food companies include Campbell Soup Company (NYSE:CPB), Kellogg Company (NYSE:K), ConAgra Foods, Inc. (NYSE:CAG), and Mondelez International Inc (NASDAQ:MDLZ). Campbell and Mondelez International Inc (NASDAQ:MDLZ)feature trailing earnings multiples in the 18-19 range, so quite close to where The J.M. Smucker Company (NYSE:SJM)trades- their forward P/Es are also in line with what we saw at that company. Each of these stocks also features a beta of 0.5 or lower, making them competitive from a defensive perspective as well. However, their bottom lines have not been holding up as well. Specifically, Campbell Soup Company (NYSE:CPB) experienced a 2% increase in earnings last quarter compared to a year ago, despite significantly higher sales growth, while Mondelez International Inc (NASDAQ:MDLZ)’s operating income declined (earnings results aren’t quite comparable due to the breakup of what was Kraft Foods).
Kellogg Company (NYSE:K) and ConAgra Foods, Inc. (NYSE:CAG) are in a more complex position from an earnings perspective: they carry forward P/Es of 15 and 13, respectively, making them priced about even to slightly lower than the other three companies we’ve discussed here, but those figures depend on significant improvement in their businesses given that their valuation represents a steep premium over their peers. Once again these companies are somewhat insulated from the broader economy, with betas in the 0.4-0.5 range, and they both offer dividend yields of about 3% as well. Revenue has been rising at double-digit rates for both Kellogg Company (NYSE:K) and ConAgra Foods, Inc. (NYSE:CAG), going by recent quarterly reports, but at least thus far earnings have been down and management would have to reverse that to put these companies on track towards their peer group.
We like that over the past year The J.M. Smucker Company (NYSE:SJM) was generally able to increase both its revenue and net income, but we would be a bit concerned about sales results in its most recent quarter. While growth seems generally high enough that it might be able to justify its current valuation, the company is dependent on an expanding business and any sign that might not occur would be reason enough to avoid the stock.
Disclosure: I own no shares of any stocks mentioned in this article.
