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The J.M. Smucker Company (SJM), Dunkin Brands Group Inc (DNKN): Four Reasons to Buy this Coffee Company

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Shares of The J.M. Smucker Company (NYSE:SJM) have appreciated nearly 40% over the last year. But unlike most food companies, its impressive financial performance has been totally driven by organic growth. Now that its shares appear to be fairly valued, the Street is questioning the sustainability of its rally. However, here are four reasons why The J.M. Smucker Company (NYSE:SJM) appears to be a great investment, even at its current valuations.

The J.M. Smucker Company (NYSE:SJM)

Coffee bonanza

Thanks to the prolonged production bonanza and mounting stockpiles, coffee bean prices recently touched 33-month lows. As a result, coffee margins expanded, which eventually resulted in higher earnings. But instead retaining hefty margins, The J.M. Smucker Company (NYSE:SJM) slashed its coffee prices by 6% in February, which resulted in its record quarterly revenues of $5.9 billion.

Now that coffee bean prices have further declined by 3.6%, J.M. Smucker again has the option of slashing its coffee prices. But since the price cut has already done its job, The J.M. Smucker Company (NYSE:SJM) will most likely keep its prices unchanged. Its management expects the prices of coffee, peanuts and sweeteners to further decline in fiscal year 2014, which should expand J.M. Smucker’s gross margins by up to 200 basis points.

New growth avenues

J.M. Smucker directly benefits from the growth of Dunkin Brands Group Inc (NASDAQ:DNKN). The J.M. Smucker Company (NYSE:SJM) produces packaged coffee for Dunkin Brands Group Inc (NASDAQ:DNKN), which retails in grocery and convenience stores with the name Dunkin’ Donuts. For the recent quarter, Dunkin’ Donuts’ coffee volumes rose by 29% along with a 10% increase in Folgers coffee.

Dunkin Brands Group Inc (NASDAQ:DNKN) is also aggressively expanding in countries including India, China and Indonesia. These are some of the world’s fastest growing economies, offering tremendous growth prospects to almost all consumer goods companies. Dunkin Brands Group Inc (NASDAQ:DNKN) stands to benefit here, but this also opens up new indirect growth avenues for The J.M. Smucker Company (NYSE:SJM).

Optimistic forward looking statements

J.M. Smucker also has an agreement with Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) to provide K-cups for its coffees. During the earnings conference, the management of Smucker mentioned that it would remain bullish on the growth of K-cups, and has plans to launch two new varieties of the cups during 2013.

Although Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) produces coffee that rivals J.M. Smucker’s, its huge reliance on K-cups ensures a win-win situation for J.M. Smucker. But due to the maturing Keurig segment, J.M. Smucker expects the quarterly sales growth of single serve coffee from Keurig machines to slow down to 15%, down from 18%. The momentum may have slowed down, but that is still a healthy growth rate.

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