J.M. Smucker Stock's Rally Has More Than Tariffs Behind It

J.M. Smucker shares jumped about 12% following the company's first-quarter earnings report for its 2027 fiscal year (FY2027). Adjusted earnings per share (EPS) of $3.24 were a whopping $1.02 higher than the $2.22 forecasted, a 45% beat. But that's misleading for one reason. The beat included a one-time 84-cent-per-share benefit from tariff refunds. Take that away, and the beat was only about 26%. That's still an impressive gain, but some analysts question its durability in future quarters.

Moving past the EPS number, the company generated revenue of $2.22 billion. That was higher than the $2.13 billion forecast and 5% above the $2.11 billion recorded in the prior year. However, Smucker noted that the gains were largely due to pricing, not volume. In this case, higher coffee prices drove over 4% of that sales growth. The price-versus-volume dynamic is not new to Smucker. Many consumer staples companies have been under the same pressure. That's not bullish for long-term demand, a fact the company confirmed with full-year net sales guidance that calls for a 1% to 2% decline.

So why do analysts continue to move their price targets higher? The answer to that is on the company's balance sheet. Smucker's Debt Reduction Strengthens the Bull Case In 2023, Smucker paid approximately $5.6 billion to acquire Hostess, the parent company of iconic treats like Twinkies. That cash-and-stock deal included Smucker assuming approximately $900 million of net debt, at a rich adjusted EBITDA multiple of approximately 17.2x. Smucker took on new debt to finance the deal, raising the company's leverage ratio and prompting both Moody's and S&P to take negative rating action. To that end, the company set a goal of achieving net debt-to-EBITDA leverage below 3x. This quarter shows Smucker hit 2.9x—down from 3.8x a year ago—nearly a year ahead of schedule. That deleveraging is showing up elsewhere in the numbers as well. Free cash flow swung to $337.3 million from negative $94.9 million a year ago, and operating cash flow flipped from -$10.6 million to $425.7 million. This is arguably the most important part of the J.M. Smucker earnings report for long-term investors. Debt reduction does not generate the same headline excitement as an EPS beat, but it can materially change how investors value a consumer staples company. Lower leverage gives Smucker greater financial flexib...