Earnings

Choosing Between Flowers Foods, Inc. (FLO) and The J. M. Smucker Company (SJM)

Flowers Foods, Inc. (NYSE:FLO) shares are down more than -5.36% this year and recently increased 1.07% or $0.2 to settle at $18.90. The J. M. Smucker Company (NYSE:SJM), on the other hand, is down -16.84% year to date as of 11/13/2017. It currently trades at $106.49 and has returned 6.50% during the past week.

Flowers Foods, Inc. (NYSE:FLO) and The J. M. Smucker Company (NYSE:SJM) are the two most active stocks in the Processed & Packaged Goods industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect FLO to grow earnings at a 1.80% annual rate over the next 5 years. Comparatively, SJM is expected to grow at a 7.35% annual rate. All else equal, SJM’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 19.07% for The J. M. Smucker Company (SJM). FLO’s ROI is 8.10% while SJM has a ROI of 6.10%. The interpretation is that FLO’s business generates a higher return on investment than SJM’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. FLO’s free cash flow (“FCF”) per share for the trailing twelve months was -0.02. Comparatively, SJM’s free cash flow per share was +1.33. On a percent-of-sales basis, FLO’s free cash flow was -0.11% while SJM converted 2.04% of its revenues into cash flow. This means that, for a given level of sales, SJM is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. FLO has a current ratio of 1.40 compared to 1.00 for SJM. This means that FLO can more easily cover its most immediate liabilities over the next twelve months. FLO’s debt-to-equity ratio is 0.67 versus a D/E of 0.75 for SJM. SJM is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FLO trades at a forward P/E of 20.24, a P/B of 3.13, and a P/S of 0.99, compared to a forward P/E of 13.27, a P/B of 1.73, and a P/S of 1.63 for SJM. FLO is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. FLO is currently priced at a -6.16% to its one-year price target of 20.14. Comparatively, SJM is -8.54% relative to its price target of 116.43. This suggests that SJM is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.40 for FLO and 2.90 for SJM, which implies that analysts are more bullish on the outlook for SJM.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. FLO has a beta of 1.07 and SJM’s beta is 0.63. SJM’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.FLO has a short ratio of 9.41 compared to a short interest of 6.22 for SJM. This implies that the market is currently less bearish on the outlook for SJM.

Summary

The J. M. Smucker Company (NYSE:SJM) beats Flowers Foods, Inc. (NYSE:FLO) on a total of 9 of the 14 factors compared between the two stocks. SJM generates a higher return on investment, is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, SJM is the cheaper of the two stocks on an earnings and book value, SJM is more undervalued relative to its price target. Finally, SJM has better sentiment signals based on short interest.

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