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Shares of J.M. Smucker Co. (NYSE: SJM) are dropping hard on Valentine’s Day after a poor earnings report.
Smucker stock is down over 7% in early trading on Friday, continuing the weakness seen in other food company stocks this past week.
On Tuesday Dean Foods (NYSE: DF), Con Agra (NYSE: CAG), and Annie’s (NASDAQ: BNNY) were all lower after disappointing earnings reports.
Front and center for the collapse were rising commodity prices that were difficult if not impossible to pass through to consumers.
Who said there was no inflation?
J. M. Smucker reported adjusted earnings of $1.66 per share, missing estimates by 2 cents per share. Revenues also missed expectations. Sales of $1.465 billion were less than the average estimate of $1.53 billion.
Looking forward, the maker of jam, peanut butter and other food products reduced guidance for its fiscal year ending April 30, 2014. Management now expects profit to fall in a range of $5.55 to $5.60 per share. That was less than the previous range of $5.72 to $5.82.
Sales guidance was also lowered, marking the second straight quarter of reductions.
Lower price realization on coffee and peanut butter products are to be blamed and demonstrate the problems for food companies when commodity prices are rising, but consumer prices are falling.
The collapse in the food segment is particularly troubling given the defensive nature of these stocks. Many investors flock to these companies at times of uncertainty, hoping for stable growth.
To the extent operating results are volatile as they have been, that stability ends up being a pipe dream.
In addition many investors buy these stocks for their dividends. In the absence of suitable income returns elsewhere, prices have been bid up on these high-dividend players.
J. M. Smucker stock is a good example.
The company pays a very healthy 2.5% dividend. For the last couple of years, a bet on Smucker paid off.
Shares have risen steadily from the low $70s to a peak of nearly $115 reached early last fall. Since then, owning Smucker shares has been a disaster, mainly due to valuation and now poor operating results, compared to expectations.
Based on valuation alone, this is one horrible and risky investment, in my opinion.
Analysts expect Smucker to grow profits by 8% from the current fiscal year to the next. Given current operating pressure, the result is likely to be less than that.
At current prices, shares of J. M. Smucker stock trade for 15 times current fiscal year estimated earnings.
Too many people assume that defensive stocks plus dividends makes for smooth sailing. In this environment nothing could be further from the truth.
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