Campbell's and Smucker: Tasty Turnarounds?

11/24/2017 5:00 am EST

Focus: CONSUMER

George Putnam

Editor, The Turnaround Letter

Over the past 12 months, many packaged food firms have seen their share prices wilt. But the companies below have impressive financial traits: strong balance sheets, prodigious cash flows and generous payouts to shareholders, explains George Putnam, editor of The Turnaround Letter

Strategically, they have powerful brands, strong negotiating leverage with grocers, impressive distribution networks and increasingly talented and fresh leadership teams. 

Campbell’s Soup (CPB) launched its iconic canned tomato soup in 1895, and today includes well-known brands like Pepperidge Farms, V8 beverages, Prego sauces and Arnott’s cookies. It has struggled for decades to find growth outside of its soup business, leaving its stock unchanged from its 1997 price. 

In the most recent quarter, revenues from traditional products (70% of sales) fell by 3%.  However, expansion into the growing snacks category, accretive acquisitions and efficiency programs that are boosting margins should produce 2018 profits that are at least stable if not higher. Campbell’s 26% operating margin, one of the widest in the industry, will produce hefty cash flows of about $1.3 billion this year. 

Management puts a high priority on its dividend, likely important to the founding Dorrance family that has a near-controlling 40% stake.  Debt remains at a very reasonable 2.0x EBITDA and the company is repurchasing shares under its new $1.5 billion repurchase program. 

Best-known for its jams and jellies, it might be surprising to know that more than 95% of the $7.4 billion in revenue at J.M. Smucker (SJM)  is generated from other foods: coffee (including Keurig compatible packages, Folgers and Dunkin’ Donuts retail coffees), pet foods (Milk Bone), international food service (14%) and others including Jif peanut butter. 

Smucker has become adept at operational excellence, reinvigorating older niche brands and launching new products – reflected in its historically strong stock price.  However, recent lackluster sales (down 4%) depressed operating profits by 17% and contributed to the 21% share price decline in the past year. 

Nevertheless, the company’s brands are resilient: it is estimated that 93% of all U.S. households have at least one Smucker product, and 75% of its U.S. sales come from products that are #1 or #2 in their categories. Its $1.1 billion of operating cash flow compared to $310 million of capital spending leaves plenty of room for dividends and acquisitions, plus the paydown of its $5.2 billion in debt. 

With its family’s name on every label and family members sitting in the Chair and CEO seats, J.M. Smucker has a real incentive to return the stock to its former performance. 

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