J.M. Smucker (SJM) has long been known as a jam and peanut butter brand. But as coffee continues to be the popular everyday beverage for millions of Americans, Smucker has lately emerged as an unlikely java play -- with due apologies to Starbucks (SBUX).Founded in 1897 as a food and beverage company, Smucker is no longer just about fruit spreads, cooking oil, juices and baking ingredients. Thanks to its November 2008 acquisition of Folger's from Procter & Gamble (PG), it has become more of a hot coffee company, giving it a fresh and more flavorful image on Wall Street.

%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%And investors love it: Shares of Smucker have been on a huge upswing, rocketing from a 52-week low of $34 on Mar. 5, 2009, to just under $62 on Jan. 7. Don't think the stock will soon turn cold after that big run-up. Some bulls say Smucker is worth $72 and should hit that price within a year.

The stock is trading close to the low point of its five-year average price-earnings ratio of 12, where it was last year. Currently trading at 13 times projected fiscal 2011 (ending Apr. 30) earnings of $4.54 a share, Smucker could well trade at a higher p-e, according to some analysts who note that it reached a p-e of 18 in 2004. That kind of multiple would equate to $81 a share.

Since the acquisition, Folger's has contributed about 58% to Smucker's total annual sales growth. That deal gave Smucker another java jolt: With the purchase came a 25-year licensing agreement to use the Dunkin' Donuts brand, so it will contribute to the Smucker's product line.

Solid Profit Margins in Coffee


"Smucker has done a terrific job in promoting and marketing Dunikin' Donuts, whose coffee and other products resonated well with consumers," says Farha Aslam, analyst at investment bank Stephens, who rates the stock overweight. (Stephens has done banking for Smucker.) She notes that Smucker's total coffee sales amount to about $1.8 billion annually, of which Dunkin Donuts accounts for some $200 million. That's still relatively small -- but it's growing, she adds. More significant, says Aslam, are the solid profit margins that Dunkin Donuts and Folger's deliver to Smucker's bottom line.

The acquisition of Folger's coffee business "adds diversification and should provide economies of scale," says Tom Graves, analyst at Standard& Poor's, who rates Smucker a buy. Folger's substantially increased Smucker's size, he adds, and should raise total sales in fiscal 2010 to $4.5 billion, up from fiscal 2009's $3.8 billion. Among Smucker's diverse products, coffee now accounts for 25% of sales, peanut butter 14%, shortening and oils 11%, and fruit spreads 9%.

Smucker's fiscal 2010 second-quarter (ended Oct. 31) results handily beat analysts estimates and also showed that Folger's delivered better-than-expected sales and profit margins, while the core Smucker businesses have returned to more normal operating margins following the spike in commodity prices.

"Perfectly Positioned"


Analysts note that Smucker is also benefiting from a renewed trend among families to cut restaurant trips because of the economic downturn and rising unemployment. "Smucker's [product] portfolio and strong brand positioning are perfectly positioned in light of the potential for further consumer weakness and strengthening eat-at-home trends," says Mitchell B. Pinheiro, analyst at Janney Capital Markets.

He rates Smucker a buy, with a 12-month price target of $72 a share, based on his projection that the company will earn $4.54 a share in fiscal 2011 on revenues of $4.7 billion, up from an estimated $4.15 a share in fiscal 2010 on sales of $4.5 billion. In fiscal 2009, Smucker earned $3.78 on revenues of $3.7 billion.

The institutional investors that continue to hold stakes of more than 5% each in Smucker include Massachusetts Financial and Barclays Global Investor. Vanguard Group owns a 4.7%. On Wall Street, 11 of the 12 analysts who follow the company rate it a buy. One rates it a hold, and none recommend selling it.

It's Really Simple

One reason for that may be that Smucker fits what investment guru Peter Lynch says about investing. One of his strategies is to know what you're buying. Investors should buy shares of a company whose products and services they know well and are easy to understand.

Well, Folger's Coffee, Dunkin Donuts and fruit spreads definitely define what Smucker is. That's not hard to understand, which should make the stock easy to swallow.

Meet Gene Marcial at the World Money Show Orlando, Feb. 3-6, 2010, at The Gaylord Palms Resort.

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