Thursday, September 5, 2013

Checking In on J.M. Smucker's

As I mentioned in yesterday's post, I have spent the last couple of days at the Barclays Bank "Back to School" conference here in Boston.

My clients own stock in a number of the companies that presented this year:  Colgate; Procter & Gamble; Coca Cola Enterprises; and General Mills, to name a few.

But one of my favorites is J.M Smucker (ticker: SJM).

Smucker's, of course, is somewhat of an iconic American brand, thanks in part to its commercials which evoke nostalgia for a bye-gone era.  With taglines like "With a name like Smucker's, it has to be good", the company created a homespun image for its jams, jellies, peanut butter and a variety of other regularly used food items.

The company in recent years has undergone a major change in the way it runs its business, mostly for the good.  The stock has been a winner for investors, also, as the above chart shows.  The price of SJM has grown on average of +12.5% for the past five years compared to +10.3% for the S&P 500.

Over the last few years, SJM has bought several brands from Procter & Gamble, including Crisco Oil and Jif Peanut Butter, and managed to re-energize sales in a dramatic fashion.  Jif, for example, is now a $1 billion brand thanks to SJM's marketing initiatives.

The biggest acquisition for SJM in recent years, however, was its purchase of Folger's coffee from P&G in 2008.  I remember hearing SJM talk about the purchase at the 2008 "Back to School Conference".

At the time, SJM management said that while a purchase of this size seemed daunting - the $3 billion price tag was more than the total sales of SJM at the time, and they assumed a considerable amount of debt in the process.

But as I recall, management was very confident they could make the deal work, mostly because they had done their homework.  Management had spent 18 months in the field, learning everything they could about the coffee business. In addition, because they had such extensive experience in the "center of the store" grocery business, they knew how to market what seemed to be a tired brand to a whole new group of consumers.

This is fairly typical of the way the company is run, by the way. There are several generations of the Smucker family that is involved in running the company, and most of senior executives who share the last name of Smucker own a considerable amount of shares.  While they do not own the company, they run it as if it was still theirs, which makes them careful stewards of shareholder investments.

The coffee business has turned out to be another success story for the company.  In our meeting yesterday, management pointed out that coffee sales represent roughly $2.3 billion of revenues, or about 39% of the company's total sales. They have not only re-energized Folgers (focusing on the single serving K-cup that has become very popular in home coffee use) but has expanded its partnership with Green Mountain coffee and Dunkin' Donuts.

SJM is trading today at a significant premium to the S&P 500:  21x trailing twelve month earnings vs. 14x for the S&P.  As much as I like SJM management, buying the stock at today's levels is a fairly large leap of faith.

But as Warren Buffett often reminds us, it is better to buy a great business at a fair price rather than a fair business at a great price. And that might be the case with SJM today.