A year ago, The J.M. Smucker Co. (NYSE: SJM) announced that it would acquire Hostess Brands for $5.6 billion. I felt that paying a 50% premium for Hostess was excessive.

I closed that article by stating, “Smucker is paying too much to get this deal done, and that may leave a bad taste in the mouths of its shareholders.” Turns out, I was right. Since then, SJM is down 20% while the S&P 500 Index is up by a similar amount.

A few weeks ago, Smucker released its fiscal 2025 Q1 results. Those numbers were decent, including a 10 percent increase in adjusted earnings per share. However, the company also reduced its guidance for full-year net sales and adjusted earnings per share.

That day, SJM fell nearly 5%. That put it squarely on its intermediate-term technical support line near $115, from which it bounced back up to $118.

At that share price, Smucker is valued at less than 12 times forward earnings compared to a multiple of 22 for the S&P 500 Index. Its price-to-sales ratio of 1.4 is also nearly half the same multiple for the index.

Evidently, Wall Street does not believe that Smucker will be able to grow its sales or per share earnings fast enough to justify the cost of acquiring Hostess. The company holds only $40 million in cash compared to $8.7 billion in debt, so there is no easy way out of that dilemma.

Pet Projects

Despite those disconcerting valuation metrics, I believe Smucker could be close to bottoming out. Company CEO Mark Smucker apparently feels the same way: “These results are driven by the focus we have established and progress we have made in delivering our 1 core business, successfully integrating Hostess Brands, and achieving our goals for transformation, cost discipline, and cash generation.”

In other words, it is too soon to see the benefits of the Hostess transaction in Smucker’s operating results. That’s why its share price is no higher now than it was four years ago before the pandemic distorted the supply and demand curves for its food products.

Now, Smucker must steadily reduce its debt load while growing sales. The Fed is expected to cut its policy rate next week. If it does, Smucker can refinance some of its debt to decrease the size of its loan payments.

If necessary, Smucker can also sell one of its businesses. Its Milk Bone and Meow Mix pet food brands are performing quite well. However, they are the only non-human food products in the company’s portfolio.

Perhaps Smucker will divest its pet products by spinning them off as a separate entity. That way, it could retain control over that business while allowing both companies to trade on their respective merits.

Regardless of how it gets there, Smucker must find a way to deleverage its balance sheet. It could do it gradually by dedicating a big chunk of its nearly $900 million in free cash flow to paying down debt.

However, that would take ten years based on the company’s current financial metrics. I doubt Wall Street will be that patient.

Rolling the Dice

When its share price hit an all-time high in January 2023, Smucker decided to roll the dice. So far, that gamble has not paid off.

The options market isn’t feeling optimistic about Smucker’s near-term prospects, either. Last week while SMJ was trading near $119, the call option that expires in January 2026 at the $120 strike price could be bought for $15.

That means SJM must rise above $135 within the next 16 months for the intrinsic value of this option to exceed its purchase price. Bear in mind, SJM was trading very close to that price just seven months ago well after the Hostess acquisition had closed.

If Smucker’s share price does not rally soon, the company’s institutional investors may put pressure on its board of directors to do something about it. They’ve just watched their investment in Smucker underperform the S&P 500 Index by 40 percentage points during the past year.

That type of underperformance will usually get a CEO fired. Unless, as in this case, he happens to share the same last name as the company’s founder.

But even that may not be enough to save the company if its operating metrics don’t start improving soon. Loyalty does count for something on Wall Street, but profits count even more.

The green rush…

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