We expect The J. M. Smucker Company (SJM) to beat expectations when it reports fiscal third-quarter 2015 results before the opening bell on Feb 13.
Last quarter, this food products manufacturer delivered in-line earnings. Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Smucker is likely to beat earnings this quarter because it has the right combination of two key ingredients.
Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.33%. This is meaningful and a leading indicator of a likely positive earnings surprise.
Zacks Rank: Smucker carries a Zacks Rank #3 (Hold), which when combined with +1.33% ESP, makes us confident about an earnings beat.
Note that stocks with a Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
What is Driving the Better-than-Expected Earnings?
Strong organic sales growth, product innovation and constant efforts to expand through acquisitions have remained the company’s strong points.
With the acquisition of Seattle, WA-based Sahale Snacks, Inc. in September last year, the company expanded its snacks portfolio. Besides the snacks business, Smucker has also tried its hand at specialty and organic foods. In Aug 2013, the company acquired CA-based Enray Inc., which is a privately-held company that manufactures and sells organic, gluten-free ancient grain products. Demand for healthy, nutritious and natural foods has grown in recent years as people are more concerned about obesity and other health problems. These two acquisitions have fueled revenue growth in the past and are expected to contribute going forward.
The decision to acquire pet food maker Big Heart Pet Brand is also encouraging and will put the company in the fast growing pet food and snacks category in the U.S. After the completion of this acquisition in April, it is expected to become a strong revenue driver besides the existing food and beverage businesses.
However, the company remains concerned about the hike in coffee costs. Since Jan 2014, Smucker has been witnessing a rise in green coffee costs, largely due to increasing prices of Arabica coffee as a result of an ongoing drought in Brazil. As a result, Smucker had to raise packaged coffee prices of Folgers and Dunkin' Donuts branded coffee products, as a result of which the company has witnessed volume declines in the first half of fiscal 2015.
Though the company expects higher green coffee costs to continue to impact third quarter results, it is also optimistic that volume trends will improve in the second half of fiscal 2015 as compared to the second quarter fiscal 2015 results.
Other Stocks to Consider
Other stocks in the consumer staples/retail sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
SUPERVALU Inc. (SVU) with an Earnings ESP of +4.76% and a Zacks Rank #1 (Strong Buy)
Tyson Foods, Inc. (TSN) with an Earnings ESP of +1.35% and a Zacks Rank #2 (Buy).
Dr Pepper Snapple Group Inc. (DPS) with an Earnings ESP of +2.30% and a Zacks Rank #2.
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