Deepening supply chain bottlenecks and rising energy and transportation costs have pushed food prices higher lately. However, strong demand for packaged and ready-to-cook food products with prolonged shelf life should allow food makers to handle rising input costs by passing them on to the customers. Also, rapid digitalization of operations and new product launches to keep pace with changing consumer tastes should benefit these companies substantially.
Investor interest in this consumer defensive industry is evident from the First Trust Nasdaq Food & Beverage ETF’s (FTXG) 4.3% gains over the past three months versus the SPDR S&P 500 Trust ETF’s (SPY) 10.4% loss. The global packaged food market is expected to grow at a 6.3% CAGR to $4.26 trillion by 2026.
Kellogg Company (K) and J.M. Smucker Company (SJM) are two prominent players in the packaged foods industry. K manufactures and markets ready-to-eat cereal, frozen, and convenience foods. It sells its products to retailers through direct sales forces, brokers, and distributors. SJM produces and markets branded food and beverage products and pet food and snacks worldwide. Both the companies sell their products to food retailers and wholesalers through direct sales forces, brokers, and distributors.
While SJM gained 3.3% over the past month, K surged 7.8%. K is a clear winner with 13.6% gains year-to-date versus SJM’s 6.2% returns. But which of these stocks is a better pick now? Let’s find out.
Recent Financial Results
K’s consolidated net sales for its fiscal 2022 first quarter ended April 2, 2022, increased 2.5% year-over-year to $3.67 billion. The company’s gross profit came in at $1.12 billion, down 6.3% from the prior-year period. Its adjusted operating profit came in at $476 million, indicating a 4.2% year-over-year decline. While its adjusted net income decreased 1.1% year-over-year to $376 million, its adjusted EPS fell marginally to $1.10. As of April 2, 2022, the company had $313 million in cash and cash equivalents.
K will pay a $0.58 quarterly cash dividend on June 15, 2022. The stock pays a $2.32 per share dividend annually, translating to a 3.17% yield. The company’s dividend has grown at a 2.41% rate over the past five years. K has increased its dividends for 17 consecutive years.
For its fiscal 2022 third quarter ended January 31, 2022, SJM’s net sales decreased marginally year-over-year to $2.06 billion. The company’s adjusted gross profit came in at $712.30 million, down 8.2% from the prior-year period. Its adjusted operating income came in at $377.90 million, representing a 6.4% fall from the year-ago period. SJM’s adjusted net income came in at $252.50 million, indicating an 8.6% year-over-year decline. Its adjusted EPS came in at $2.33, representing a 4.9% decline from the prior-year period. The company had $54.48 million in cash and cash equivalents as of March 31, 2022.
SJM will pay a $0.99 quarterly cash dividend on June 1, 2022. The stock pays a $3.96 per share dividend annually, translating to a 2.74% yield. The company’s dividend has grown at a 5.71% rate over the past five years. SJM has increased its dividends for 19 consecutive years.
Past and Expected Financial Performance
Over the past three years, K’s EBITDA and EPS have increased at CAGRs of 3.5% and 9.9%, respectively.
K’s EPS is expected to decrease 1.2% year-over-year in fiscal 2022, ending December 31, 2022, and rise 4.6% in fiscal 2023. Its revenue is expected to grow 2.8% in fiscal 2022 and 2% in fiscal 2023. Analysts expect the company’s EPS to grow at a 2.6% rate per annum over the next five years.
Over the past three years, SJM’s EBITDA and EPS have increased at CAGRs of 1.8% and 1.3%, respectively.
Analysts expect SJM’s EPS to decline 6.2% year-over-year in fiscal 2023, ending April 30, 2023, and 4% in fiscal 2024. Its revenue is expected to decline 0.8% year-over-year in fiscal 2022 and rise 1% in fiscal 2023. Analysts expect the company’s EPS to grow at a 1.6% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, SJM is currently trading at 24.19x, 412.5% higher than K’s 4.72x. In terms of forward EV/Sales, K’s 2.25x compares with SJM’s 2.50x.
Profitability
K’s trailing-12-month revenue is almost 1.8 times SJM’s. K is also more profitable, with a 7.6% levered free cash flow margin versus SJM’s 7.1%.
Furthermore, K’s ROE, ROA, and ROTC of 38.9%, 7.1%, and 10.7% compare with SJM’s 7%, 4.3%, and 5.4%, respectively.
POWR Ratings
While K has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, SJM has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both K and SJM have been graded a C for Value, in sync with their slightly higher-than-industry valuation ratios. K’s 2.25x forward EV/Sales is 25.3% higher than the 1.80x industry average. SJM has a 2.50x forward EV/Sales, 39.3% higher than the 1.80x industry average.
K has a B grade for Quality, which is consistent with its higher-than-industry profitability ratios. K’s 44.5% trailing-12-month return on common equity (ROE) is 227.8% higher than the 13.6% industry average. SJM’s C grade for Quality is in sync with its lower-than-industry profitability ratios. SJM has a 7% trailing-12-month ROE, which is 48.5% lower than the 13.6% industry average.
Of the 87 stocks in the B-rated Food Makers industry, K is ranked #22, while SJM is ranked #36.
Beyond what we have stated above, our POWR Ratings system has graded SJM and K for Sentiment, Growth, Stability, and Momentum. Get all SJM ratings here. Also, click here to see the additional POWR Ratings for K.
The Winner
Despite rising input costs, the strong demand for packaged food products should benefit K and SJM in the coming months. However, relatively lower valuation and higher profitability make K a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Food Makers industry.
K shares were trading at $73.34 per share on Tuesday afternoon, up $0.18 (+0.25%). Year-to-date, K has gained 14.86%, versus a -13.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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