The J. M. Smucker Company (NYSE:SJM) shares are up more than 2.05% this year and recently increased 0.08% or $0.1 to settle at $126.79. Treehouse Foods, Inc. (NYSE:THS), on the other hand, is down -0.02% year to date as of 01/09/2018. It currently trades at $49.45 and has returned 0.71% during the past week.
The J. M. Smucker Company (NYSE:SJM) and Treehouse Foods, Inc. (NYSE:THS) are the two most active stocks in the Processed & Packaged Goods industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect SJM to grow earnings at a 8.83% annual rate over the next 5 years. Comparatively, THS is expected to grow at a 1.70% annual rate. All else equal, SJM’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 3.56% for Treehouse Foods, Inc. (THS). SJM’s ROI is 6.10% while THS has a ROI of -2.50%. The interpretation is that SJM’s business generates a higher return on investment than THS’s.
Cash is king when it comes to investing. SJM’s free cash flow (“FCF”) per share for the trailing twelve months was -0.16. Comparatively, THS’s free cash flow per share was -1.65. On a percent-of-sales basis, SJM’s free cash flow was -0.25% while THS converted -1.53% 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
Balance sheet risk is one of the biggest factors to consider before investing. SJM has a current ratio of 1.00 compared to 2.20 for THS. This means that THS can more easily cover its most immediate liabilities over the next twelve months. SJM’s debt-to-equity ratio is 0.75 versus a D/E of 1.04 for THS. THS is therefore the more solvent of the two companies, and has lower financial risk.
SJM trades at a forward P/E of 15.43, a P/B of 2.04, and a P/S of 1.95, compared to a forward P/E of 17.99, a P/B of 1.09, and a P/S of 0.44 for THS. SJM is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S 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”. SJM is currently priced at a 2.58% to its one-year price target of 123.60. Comparatively, THS is -0.7% relative to its price target of 49.80. This suggests that THS 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 2.80 for SJM and 2.70 for THS, which implies that analysts are more bullish on the outlook for SJM.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. SJM has a beta of 0.66 and THS’s beta is 0.52. THS’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.SJM has a short ratio of 6.51 compared to a short interest of 4.60 for THS. This implies that the market is currently less bearish on the outlook for THS.
Treehouse Foods, Inc. (NYSE:THS) beats The J. M. Smucker Company (NYSE:SJM) on a total of 7 of the 14 factors compared between the two stocks. THS is growing fastly. In terms of valuation, THS is the cheaper of the two stocks on book value and sales basis, THS is more undervalued relative to its price target. Finally, THS has better sentiment signals based on short interest.