Uncrustables, Innovative Sweet Snacks, And Tactical Brand Investments Propel Toward $1 Billion Sales Goal

Key Takeaways

• Expansion in sweet snacks and strategic pricing in coffee are expected to drive significant sales growth and enhance revenue.
  
• Synergies from Hostess Brands integration and marketing investments aim to improve margins and solidify market share in competitive categories.
  
• Inflation and reduced convenience store shopping, alongside underperforming pet co-manufacturing sales and coffee price sensitivity, could curtail J. M. Smucker's sales volume and revenue.

Catalysts

Manufactures and markets branded food and beverage products worldwide.

• The expansion of Uncrustables products and innovation in the sweet snacks category is likely to drive significant sales growth and contribute positively towards achieving a $1 billion sales target by fiscal year 2026, positively impacting revenue growth.
  
• Additional pricing actions within the coffee portfolio, due to green coffee cost increases, are expected to enhance revenue while balancing volume/mix growth with pricing strategies, aiming at managing cost pressures and preserving margins.
  
• Synergy realizations and productivity savings from the integration of Hostess Brands, coupled with the removal of stranded overhead costs, are designed to improve net margins and earnings through cost efficiencies and operational improvements.
  
• The focus on derisking parts of the business experiencing softness, especially in the Sweet Baked Snacks and pet snacks categories, suggests a strategic effort to stabilize and grow these segments by adjusting to consumer spending and channel dynamics, safeguarding revenue and margins in discretionary categories.
  
• Investments in marketing and brand positioning, particularly for newly acquired Hostess brands and core product lines like Uncrustables and coffee, indicate a commitment to driving brand equity and consumer demand, which is expected to fuel revenue growth and strengthen market share in competitive categories.

Assumptions

• Analysts are assuming J. M. Smucker's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 11.3% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $9.88) by about September 2027, up from $745.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.8x on those 2027 earnings, down from 17.2x today. This future PE is lower than the current PE for the US Food industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 4.19% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.81%, as per the Simply Wall St company report.

Risks

• The impact of inflation on discretionary spending, especially in the sweet baked goods and dog snacks categories, could reduce consumer demand and affect sales volume and revenue.
  
• The acceleration in consumers shopping less frequently in convenience stores where J. M. Smucker over-indexes with Sweet Baked Snacks, impacting sales in this important channel and potentially leading to lower overall revenue.
  
• Dependence on pet co-manufacturing sales, which are coming in less than anticipated, indicating a risk in the predictability of sales volumes and their contribution to net revenue.
  
• Price elasticity of demand in response to another round of pricing in the coffee portfolio due to ongoing green coffee cost increases, which could lead to decreased volume sold, affecting net sales growth and margin.
  
• The anticipation of marketing spend being below expectations as a percentage of sales, which may limit brand visibility and growth potential, particularly in newly acquired portfolio areas such as Hostess, impacting long-term revenue growth.

Valuation

• The analysts have a consensus price target of $125.12 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 $136.0, and the most bearish reporting a price target of just $112.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.3 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 5.8%.
• Given the current share price of $120.27, the analyst's price target of $125.12 is 3.9% 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.