Over the past few years, food and beverage firms contended with a rapidly-changing business landscape which has put significant pressure on these companies. 

The advent of GLP-1 drugs and increasingly health-conscious consumers have led to changing behaviors and growing demand for healthier alternatives. On top of this, consumers are also opting for more affordable options rather than premium food items due to higher prices over the past couple of years.

At the same time, other pressures are mounting. Tariffs, high ingredient costs, and elevated labor expenses are eating into margins. To make matters more complicated, the administration is pushing for the removal of artificial food coloring in favor of natural alternatives in foods and beverages, representing a potential regulatory roadblock.

Combined, these trends are creating significant uncertainties for food and beverage companies.

Despite this, The J.M. Smucker Company (SJM), a legacy food and beverage company continues to perform.

The 127-year-old company owns Smucker’s, its flagship brand known for fruit spreads and peanut butter, as well as popular coffee brand Folgers, to name a few.

Over the past decade, the company has steadily grown and diversified its business through strategic acquisitions. In 2015, it acquired Big Heart Pet Brands, expanding its footprint in the pet food segment. Then, in 2023, it acquired bakery company Hostess Brands, the firm behind the popular snack brand Twinkies.

Earlier this year, the company took steps to optimize its portfolio and strengthen its snacks segment by divesting its Cloverhill and Big Texas value brands along with other private label products. The company also reorganized the leadership for both its pet food and snacks segments to better support these initiatives.

Thanks to its expansion into high-growth categories and strategic moves, the company has been able to weather changing consumer preferences and cost pressures while steadily generating returns over the past few years.

Since 2020, the J.M. Smucker Company’s revenues have averaged $8 billion while maintaining strong returns. The company’s Uniform return on assets (“ROA”) has consistently remained above 20% during this period, reaching 34% this year.

Yet despite being a consistent performer, the company trades at just 11.6x Uniform P/E, well below corporate averages. At these valuations, the market expects the company’s returns will fall to 17% by 2030, a substantial drop from its historical performance.

This expectation signals that the market is concerned about shifting consumer preferences and cost pressures. However, the company has demonstrated its ability to consistently generate revenues and returns over the long term.

If the company maintains its performance, its stock could offer significant upside for investors.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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