1 Blue-Chip Stock To Sell, 1 To Buy

Tim Begany's picture

Tuesday, March 24, 2015 - 12:00pm

by Tim Begany

Even blue-chip stocks can be bad investments.


Take American Tower Corp. (NYSE: AMT) as an example. It is the world's largest independent operator of wireless and broadcast communication sites, and is looking at an onerous, possibly unmanageable debt load.


The company may seem bulletproof, operating roughly 70,000 wireless cell tower sites across the globe.


Financial results have been superb, with revenues more than doubling since 2009 to $4.1 billion. The firm's stock delivered a market-trouncing 17% rate of return during the past five years.



But American Tower is losing steam. After increasing earnings 19% annually from fiscal years 2009 to 2014, growth is set to downshift to about an 11% pace, analysts say.


And that forecast may be optimistic in view of the firm's heavy exposure to weakening foreign currencies, which are showing progressively smaller dollar values as the greenback soars. This headwind is apt to worsen as central bank stimulus outside the United States causes foreign currencies to tumble further and as foreign sales account for an increasingly larger chunk of American Tower's business. Such sales are projected to rise to 40% of total revenue by 2016 from a third now.


The firm's balance sheet has also become a hindrance. After five years of heavy spending on acquisitions and capital improvements, American Tower now carries nearly $14 billion in total debt. That works out to a debt-to-equity ratio of 3.5 -- nearly three times the industry average. The heavy burden recently prompted management to suspend share buybacks.


Moreover, American Tower's bonds are only a step away from junk status. They're currently rated Baa3 by Moody's Investors Service, the lowest investment-grade rating.


Because American Tower is so highly leveraged, Moody's recently affirmed a negative outlook on this rating. It also warned American Tower could be downgraded if it fails to reduce net debt to roughly 5.5 times EBITDA, from more than six times currently, by the end of the year.


That debt concern is reason enough to unload shares of this recent strong performer.


As an alternative, investors should consider a leader in something that's even more critical than wireless communication: food.


The J.M. Smucker Co. (NYSE: SJM) has behaved like a true blue chip, posting steady growth by selling staples such as coffee, peanut butter and jam under several popular brands such as Folgers, Jif and Crisco, along with its namesake Smucker's brand. Thanks to both organic growth and acquisitions, the company's revenue base has grown 50% in the past five years to a recent $5.6 billion. Per share profits have grown an even more impressive 74% in that time.



Another reason to prefer this steady grower: it has a solid balance sheet, with a debt-to-equity ratio of just 0.4. That's less than half the packaged foods industry average of 0.9 and a tenth of American Tower's ratio. Smucker's bonds are rated Baa2 (a step above American Tower's) with a stable outlook.


Thanks to more conservative capital management, Smucker has an established dividend with a history of raises going back 16 years. American Tower has only paid a dividend since 2012, when it reorganized as a real estate investment trust.


Smucker has its own challenges to address, though, including higher coffee prices and changing consumer tastes. These factors have been a drag on Smucker's largest segment, U.S. retail coffee, which accounts for 38% of total revenue.


During the nine months ended January 31, segment sales and profits dropped 5% and 13%, respectively, mainly reflecting slower demand for Folgers. Attempts to offset higher input costs through price increases have hurt the flagship brand, as did the continued shift to premium coffees.


Smucker is adjusting, however, by expanding an existing relationship with Dunkin' Brands Group, Inc. (Nasdaq: DNKN) in which it's licensed to sell Dunkin' Donuts premium coffee in supermarkets. Under a new multi-year agreement that commences in June, the firm will also market Dunkin' K-Cups to grocery chains, mass merchandisers, drug stores and other retail outlets.


In what should be a major growth driver, Smucker is also expanding into the fast-growing, $21-billion companion animal industry by acquiring Big Heart Pet Brands, a premium pet food maker. The $5.8-billion acquisition, announced in February, is expected to boost sales by more than $2.2 billion annually.


Moreover, recent results indicate continued strength in the U.S. retail consumer foods segment. During the nine months ended January 31, segment profits jumped 15% to $346 million on increased promotions, higher sales volumes and lower costs for peanuts and oils. Segment profit margins rose by three percentage points to nearly 21%.


Risks To Consider: American Tower's nosebleed price-to-earnings ratio of 48 is especially concerning since it faces hefty debt burdens. Smucker's P/E of 21 is much more palatable.


Action To Take --> American Tower has been a lucrative investment, but it's time to take profits. Shareholders should consider moving proceeds into Smucker, a reliable blue chip set for solid growth with less foreign currency risk (non-U.S. sales account for less than a quarter of revenue). With a healthy balance sheet and promising expansion prospects, Smucker should be able to meet its long-term goal of 8% earnings growth, as well as maintain its current 12% pace of dividend growth.


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Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.