Can J.M. Smucker (SJM) Surprise Earnings Estimates in Q4?

Zacks

The J. M. Smucker Co. SJM is set to report fourth-quarter fiscal 2015 results before the opening bell on Jun 4. Last quarter, this food products manufacturer posted a positive surprise of 2.67%. Let’s see how things are shaping up prior to the announcement.

Factors to Consider

Strong organic sales growth, product innovation and constant efforts to expand through acquisitions have remained the company’s strong points. However, lower coffee volumes owing to a rise in coffee prices and weakness in K-cup sales remain concerns for Smucker.

Since Jan 2014, Smucker has been witnessing a rise in green coffee costs, largely due to increasing prices of Arabica coffee as the result of a drought in Brazil. Consequently, Smucker increased packaged coffee prices of Folgers and Dunkin' Donuts brands by an average 9% and that of K-Cups in the U.S. by an average 8%. Higher coffee prices, particularly of the Folgers brand, have largely resulted in volume declines. Not only Smucker, other coffee companies like Starbucks Corp. SBUX and Kraft Foods Group, Inc. KRFT have also raised coffee prices.

Smucker expects a decline of nearly 3% in fiscal 2015 sales compared with the prior year, primarily in the U.S. Retail Coffee segment. Given the anticipated lower coffee volumes, the company expects full year U.S. Retail Coffee segment profits to decline approximately 15% compared with the prior year.

The performance of the K-Cup business has also been sluggish since second quarter fiscal 2014 due to an increase in the number of competitors, including many unlicensed participants that entered the market during 2014. Weakness in Millstone K-cup packs has also contributed to the decline. Now with the recent increase in K-cup prices resulting from higher green coffee costs, the company expects further volume declines in K-cups in fiscal 2015.

Currency impact continues to remain a headwind through the end of the fiscal year and into fiscal 2016, due to further weakening of the Canadian dollar.

Encouragingly, Smucker’s acquisition strategies help it to pull up the top line to some extent. The acquisition of Seattle, WA-based Sahale Snacks, Inc. in Sep 2014 will contribute approximately $25 million to fiscal 2015 sales. In the fourth quarter fiscal 2015, the company completed the acquisition of pet food maker Big Heart Pet Brand, which has placed it in the fastest growing pet food and snacks category in the U.S. The acquisition will be accretive to fiscal 2016 earnings and revenues.

Excluding the impact of Big Heart Pet Brands acquisition, the company expects fiscal 2015 earnings per share to be around 3% below the midpoint of its previous guidance range of $5.45 to $5.65.

The Zacks Consensus Estimate for the fourth quarter stands at 99 cents while that for fiscal 2015 stands at $5.37 per share.

Earnings Whispers?

Our proven model does not conclusively show that Smucker is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP:The Expected Surprise Prediction or ESP for Smucker is 0.00% as both the Zacks Consensus Estimate and Most Accurate Estimate stand at 99 cents per share.

Zacks Rank: Smucker carries a Zacks Rank #2 (Buy), which when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Another Stock to Consider

Another stock in the consumer staples/retail sector that has both a positive earnings ESP and a favorable Zacks Rank is:

Ingredion Inc. INGR with an Earnings ESP of +1.35% and a Zacks Rank #3 (Hold)

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