The J.M. Smucker Company Quarterly Valuation – June 2014 $SJM
Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Highest Dividend Yields Among Undervalued Companies for the Enterprising Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how J.M. Smucker Company (SJM) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): The J. M. Smucker Company operates principally in the manufacturing and marketing of branded food products. Majority of the Company’s sales are in the United States. The Company’s operations outside the United States are principally in Canada, although products are exported to other countries as well. The Company operates in three segments: U.S. Retail Coffee, U.S. Retail Consumer Foods, and International, Foodservice and Natural Foods. In August 2013, the Company completed an acquisition of Enray Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary
Key Data:
| Recent Price | $105.48 |
| MG Value | $101.53 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $69.38 |
| Value Based on 0% Growth | $40.67 |
| Market Implied Growth Rate | 6.77% |
| Net Current Asset Value (NCAV) | -$24.62 |
| PEmg | 22.05 |
| Current Ratio | 1.73 |
| PB Ratio | 2.13 |
Balance Sheet – 4/30/2014
| Current Assets | $1,539,100,000 |
| Current Liabilities | $891,000,000 |
| Total Debt | $1,879,800,000 |
| Total Assets | $9,072,100,000 |
| Intangible Assets | $6,122,500,000 |
| Total Liabilities | $4,042,500,000 |
| Outstanding Shares | 101,700,000 |
Earnings Per Share
| 2014 | $5.46 |
| 2013 | $5.00 |
| 2012 | $4.06 |
| 2011 | $4.05 |
| 2010 | $4.19 |
| 2009 | $3.12 |
| 2008 | $3.00 |
| 2007 | $2.76 |
| 2006 | $2.45 |
| 2005 | $2.26 |
Earnings Per Share – ModernGraham
| 2014 | $4.78 |
| 2013 | $4.33 |
| 2012 | $3.89 |
| 2011 | $3.68 |
| 2010 | $3.36 |
| 2009 | $2.87 |
Dividend History
SJM Dividend data by YCharts
Conclusion:
J.M. Smucker Company qualifies for the Enterprising Investor but not the Defensive Investor, who has concerns with the low current ratio and the high PEmg ratio.  The Enterprising Investor’s only issue is with the high level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of General Mills (GIS).  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.36 in 2010 to $4.78 in 2014.  This level of demonstrated growth supports the market’s implied estimate of 6.77% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on The J.M. Smucker Company (SJM)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in The J.M. Smucker Company (SJM) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
