J. M. Smucker (SJM): Buy, Sell, or Hold Post Q1 Earnings?

J. M. Smucker has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 10.6% to $112.89 per share while the index has gained 5.8%.

Is now the time to buy J. M. Smucker, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think J. M. Smucker Will Underperform?

We're cautious about J. M. Smucker. Here are three reasons why there are better opportunities than SJM and a stock we'd rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.

The demand for J. M. Smucker’s products has generally risen over the last two years but lagged behind the broader sector. On average, the company’s organic sales have grown by 4.6% year on year.

2. Shrinking Operating Margin

Operating margin is a key profitability metric because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.

Analyzing the trend in its profitability, J. M. Smucker’s operating margin decreased by 23.7 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. J. M. Smucker’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 7.7%.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

J. M. Smucker historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.8%, lower than the typical cost of capital (how much it costs to raise money) for consumer staples companies.

Final Judgment

J. M. Smucker falls short of our quality standards. That said, the stock currently trades at 11× forward P/E (or $112.89 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.

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