At the peak of August's market volatility, many good companies were caught in the downdraft. Case in point: J.M. Smucker (NYS: SJM) . The 114-year-old jam and food company missed earnings expectations by a fraction of a hair, which prompted investors to dump it as if it were the next Lehman Brothers. Smucker, however, isn't some bank loaded with mispriced derivatives. It's a rock-solid consumer institution, and at the moment, it seems a bit oversold.
It just so happened that Aug. 18 was a bad day to disappoint the market. Investors were unnerved by the twin calamities of the U.S. debt ceiling debate and the European sovereign debt crisis, and the S&P 500 was down 3.9%. But that was light compared to the beating that Smucker sustained. Its shares fell 7% to $70.02, then continued to slide further down to $68.72 on Aug. 24. The stock price has since recovered, along with the broader market, to the low $70s. Still, the shares remain well below their 52-week high of $80.25.
Smucker is a good example of the high level of correlation that has characterized equities markets of late. When panic sets in, investors tend to sell equities as an asset class, dumping the good companies with the bad. In fact, they often sell the good companies first, because it is easier to find a buyer without taking too much of a loss. Correlation of S&P 500 shares reached an all- time high on Aug. 24, breaking a record that was established in 1987.
As American as apple butter -- er, pie
Smucker is one of the world's more stable companies. It has been family-run for four generations, and it is still based in Orrville, Ohio, where Jerome Monroe Smucker founded the business, selling apple butter from a cart.
Over the years, Smucker has evolved into a diversified food conglomerate in the U.S. and Canada, with No. 1 and No. 2 brands in a broad range of markets. Its portfolio of brands includes the namesake jams and fruit spreads, Folgers coffee, and the retail rights to Dunkin Donuts coffee, among many others
The company remains solidly profitable, despite the challenges in its markets. Smucker has generated about $360 million in cash over the last year and has a dividend yield of 2.7%. It's also reasonably priced, at about 13 times 2012 earnings estimates.
Scalded by the coffee market
So what was Smucker's crime against the market? Its revenue for the first fiscal quarter came in a bit light -- $1.19 billion, versus the $1.25 billion that investors were expecting.
The trouble occurred in the coffee market, where Smucker has a leading position, thanks to its acquisition of Folgers in 2008 from rival Procter & Gamble (NYS: PG) . Coffee prices have soared over the last year. Smucker has had to walk a fine line, passing along some of its costs in a careful way. While it has maintained its profitability in a slow economy, it hasn't been able to please everyone. Coffee sales by volume declined 8% in the latest quarter due to the price increases. That has made it difficult to grow revenue as fast as investors expect.
The dilemma in the coffee market appears to be easing, though. Coffee futures havedeclined1.7% during the last six months. Smucker was the first major coffee company to pass along savings to consumers, reducing its prices 6% in August. Kraft (NYS: KFT) followedsuit a week later. The price decrease should help Smucker win back customers who switched to discount brands. There isn't anything unusual about Smucker's price moves; other major roasters such as Starbucks (NAS: SBUX) and Green Mountain Coffee Roasters (NAS: GMCR) are in the same boat.
Potential investors in Smuckers should also be aware of another possible vulnerable spot in its coffee business. Smucker paid $3 billion for Folgers, and the market premium from that deal now accounts for $1.6 billion of Smucker's $2.8 billion in goodwill. As fellow Fool Rex Moore noted in an analysis on Aug. 20, goodwill can be a risk if it reflects an inflated acquisition price that needs to be marked down. The classic example of this hazard is the Time Warner acquisition of AOL in 2000. In the case of Smucker, however, it seems highly unlikely that Folgers will be written down in a significant way: It remains an established and profitable brand, with a temporary revenue decline that Smucker has already addressed by reversing its recent price increases.
Every wave of panic selling creates opportunities for investors. Smucker was extremely oversold in the panic of August, and its shares have been rising in recent days. In all probability, they still have a good ways to go before they are properly priced.
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At the time thisarticle was published The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, Green Mountain Coffee Roasters, and Procter & Gamble, as well as creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days.Fool contributor Steve Rosenbush holds no financial position in any of the companies mentioned in this story, although he has imbibed all of their coffees. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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