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Smucker: Attractive Brands, Defensive Stock

 November 29, 2012 02:20 PM

By Tom Graves, S&P Capital IQ Equity Analyst, The Outlook

Our latest Focus Stock is J.M. Smucker (SJM), a leading U.S. producer of packaged food items and coffee. The stock carries S&P Capital IQ's highest recommendation of 5-STARS, or "strong buy."

We believe J. M. Smucker has a portfolio of attractive brands and expect its stock to benefit from strong cash flow generation and dividend growth.

Additionally, with current worries about international economies, we look for the shares to benefit from the U.S.-centric nature of the company's current business mix.

The company's U.S. retail consumer foods segment sells peanut butter, fruit spreads, baking products, shortenings and oils, and canned milk. Trademarks or brands include Jif, Smucker's, Pillsbury and Crisco.

The U.S. retail coffee market segment (42% of sales in fiscal 2012) includes the Folgers business, acquired in 2008, as well as Dunkin' Donuts packaged coffee, Millstone K- Cups, and Rowland Coffee. Dunkin' Donuts is a registered trademark used by SJM under license for packaged coffee products sold in retail channels such as grocery stores, mass merchandisers, club stores and drug stores. The license does not pertain to products for sale in Dunkin' Donuts restaurants.

While we think cost consciousness among consumers makes them increasingly likely to shop on the basis of price, Smucker has well-known brands that are supported with advertising and/or product innovation.

We believe that this, plus familiar consumer tastes and buying patterns, provides some protection against people trading down to less expensive private label (store brand) products.

Over the long term, we think developing international markets (e.g., Latin America and parts of Asia) provide better growth opportunity than more mature markets in the U.S. and Western Europe.

We expect rising incomes, increased urbanization, and changing lifestyles to increase consumer demand for types of packaged foods and beverages that have become popular in the U.S.

Our 12-month target price of $94 is based on a moderate price earnings (P/E) ratio premium (on estimated calendar 2012 and 2013 earnings per share) to average valuations for a group of other packaged food stocks.

We think the defensive nature of food stocks in periods of slow economic growth, plus our favorable view of J.M. Smucker's domestic business emphasis, will bolster the stock.

Also, based on an 8.3% dividend increase announced in July 2012, J.M. Smucker shares recently had an indicated dividend yield of 2.5%.

We think J.M. Smucker is in a good position to provide cash to shareholders.We anticipate that free cash flow will rise to at least $600 million in 2013. This should more than cover dividends of about $230 million, and allow for additional stock repurchase and/or potential acquisition activity, by our analysis.

Our 12-month target price, when combined with an indicated dividend yield of 2.4%, suggests prospective total return upside of about 14%.

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