Leadership Changes Will Stabilize The Hostess Brand And Support Future Earnings

Key Takeaways

• Anticipated sales improvement in Pet and Coffee portfolios, along with pricing strategies, are expected to positively impact revenue and margins.
  
• Strategic focus on Hostess acquisition, leadership changes, and marketing investments aim to stabilize and grow brand earnings.
  
• Challenges with executing M&A, distribution, and integration, coupled with cost pressures, risk profitability and revenue growth in key categories.

Catalysts

Manufactures and markets branded food and beverage products worldwide.

• J. M. Smucker anticipates sequential sales improvement in its Pet and Coffee portfolios, addressing previous disruptions and leveraging better-than-expected performance in coffee, which should positively impact revenue.
  
• The company's faith in the Hostess acquisition remains strong, focusing on five strategic pillars and leadership changes to stabilize and grow the brand, potentially enhancing earnings in the future.
  
• The effective use of pricing strategies, packaging architecture, and hedging are expected to support coffee margins, helping cushion against commodity inflation, thereby supporting net margins.
  
• Continued marketing investments to counteract competitive pressures in fruit spreads and to bolster Jif and Hostess brands are aimed at maintaining or growing market share and hence revenue.
  
• Forecasted synergies from the Hostess acquisition, tracking towards a $100 million run rate by fiscal '26 end, should provide a tailwind to earnings growth despite current integration challenges.

J. M. Smucker Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming J. M. Smucker's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.9% today to 11.2% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $9.61) by about March 2028, up from $-256.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.2 billion in earnings, and the most bearish expecting $680 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from -48.7x today. This future PE is lower than the current PE for the US Food industry at 18.7x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

J. M. Smucker Future Earnings Per Share Growth

Risks

• The company's fiscal 3Q comparable sales declined, and their fiscal 4Q sales guidance was revised downward, indicating potential challenges in maintaining revenue growth.
  
• J.M. Smucker took an $800 million goodwill write-down and a $200 million impairment charge related to its Hostess acquisition, almost 20% of the purchase price, reflecting the underperformance and risks to profitability from M&A activities.
  
• The Hostess brand faced executional challenges related to distribution, merchandising, and integration, which could impede efforts to stabilize and grow the brand, affecting future earnings.
  
• Elevated green coffee costs present a meaningful headwind for fiscal '26, risking profitability as the company considers price increases that could impact sales volume due to elasticity concerns.
  
• The Sweet Baked Snacks category, including Hostess, is experiencing pressure from a cautious consumer, competitive activity, and category declines, potentially affecting long-term revenue growth assumptions.

Valuation

• The analysts have a consensus price target of $119.368 for J. M. Smucker based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $135.0, and the most bearish reporting a price target of just $104.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.2 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $117.38, the analyst price target of $119.37 is 1.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.