The J. M. Smucker Company (SJM)

Conclusion

The J. M. Smucker Company makes and markets branded coffee, pet food, peanut butter, spreads, frozen handhelds and sweet baked snacks. At 133.26 USD per share, it has a market capitalisation of 14.2 billion USD and an enterprise value of 21.1 billion USD.

The verdict is fair. The fair value band runs from 128.07 to 192.11 USD with a midpoint of 160.09 USD, giving a margin of safety of 20.1% at the current price. Against their own ten-year medians, the price-to-earnings ratio is 62.0 against 17.1, and enterprise value to EBITDA is 15.8 against 12.2, while price to free cash flow is 9.0 against 14.9. The DCF gives 228.24 USD per share at a discount rate of 8.9%, and the fair value from historical multiples is 91.93 USD. The reverse DCF implies a growth rate of -5.1% a year, against revenue growth of 2.5% a year over five years and free cash flow per share growth of -0.7% a year over the same period.

The case rests on free cash flow conversion of 6.9x on a trailing twelve-month basis and a share count that fell 1.0% a year over five years. The dividend yield of 3.3% adds support. What could break it is leverage: net debt to EBITDA of 5.1x and interest coverage of 2.2x leave little room for weaker earnings. Return on invested capital of 4.9% against a WACC of 7.4% means the business does not yet earn its cost of capital.

Financial health

Financial health is red, with three signals assessed bad and one neutral. Net debt to EBITDA is 5.1x and interest coverage is 2.2x, while the current ratio is 0.87 and the quick ratio is 0.29. Debt to equity is 1.20. The Altman Z-score is 1.53, in the distress zone. The model was designed for manufacturers, and this company is one, so the zone applies directly. Insolvency risk: low, about 1.3% by the estimate of the Ohlson model over one to two years.

Earnings quality

Earnings quality is green, supported by free cash flow conversion of 6.9x on a trailing twelve-month basis and a share count that fell 1.0% a year over five years, which means buybacks. Five-year free cash flow conversion is not available. The accrual ratio of -9.6% means cash generation runs ahead of reported earnings. Stock-based compensation is 0.3% of revenue, and free cash flow after it is 1.56 billion USD. The Piotroski score is 5 of 9. The Beneish M-score is not available. Six of the last eight quarters beat estimates, with an average surprise of 9.7%. Current-year estimates rose 7.7% over 90 days, and next-year estimates rose 3.4%, with no downgrades in the last 30 days.

Profitability

Profitability is red. Operating margin is 9.0% against a ten-year median of 13.5%, and net margin is 2.5% against 8.0%. Gross margin, at 38.7% against 38.2%, is in line with its history, so the pressure sits further down the income statement. Return on invested capital is 4.9% against a WACC of 7.4%, a ROIC minus WACC of -2.4%, which means value is being destroyed. The five-year median ROIC is 2.0%. Return on equity is 4.0%, but the DuPont split shows an equity multiplier of 2.9x, so leverage supports that figure. Asset turnover is 0.56x. The WACC uses a cost of equity of 8.9% and a cost of debt of 5.3%, with an assumed tax rate of 21%.

Growth

Growth is yellow, with three signals assessed neutral and none good or bad. Revenue compound growth is 2.0% over three years, 2.5% over five years and 1.5% over ten years. Revenue grew in 5 of 10 comparable years. Free cash flow per share grew 17.1% a year over three years, but fell 0.7% a year over five years and rose 0.3% a year over ten years. EPS compound growth is not available. Next year's EPS estimate growth is 2.0%.

Valuation

Valuation is yellow, with one neutral signal, the verdict itself. Against their ten-year medians, the price-to-earnings ratio is 62.0 against 17.1, a premium of 263.2%. Enterprise value to EBITDA is 15.8 against 12.2, a premium of 29.8%. Price to free cash flow is 9.0 against 14.9, a discount of 39.9%. Price to book is 2.48 against 1.71, a premium of 45.0%. The DCF gives 228.24 USD per share at a discount rate of 8.9%, with 54.3% of value in the terminal period. The reverse DCF implies -5.1% growth. The fair value band is an order of magnitude built on fixed assumptions, not a price target. The dividend yield is 3.3%, the forward yield 3.4%, and the payout on free cash flow 29.4%.

Risks

Net debt to EBITDA of 5.1x and interest coverage of 2.2x mean that a fall in operating earnings would quickly strain debt service. The Altman Z-score of 1.53 and the current ratio of 0.87 point to thin liquidity. A ROIC below the WACC means that expanding invested capital currently destroys value. The Beneish M-score, five-year free cash flow conversion and EPS growth are not available. This analysis has no debt maturity schedule and no revenue by segment, so refinancing timing and the mix of business cannot be judged.