2023-06-08 08:30:00 ET
Summary
- Campbell Soup Company is trading close to its 52-week low, making it a potential value investment.
- The company reported a 5% YoY revenue increase in its fiscal third quarter, driven by favorable price realization.
- Snacks are a growth driver for CPB, with eight key brands showing double-digit sales growth in the last quarter.
Earnings time can be a great opportunity to pick up quality names at bargain prices. That’s because the market tends to have a strong reaction either way, sending a stock up on exuberance or down on over-pessimism.
Such appears to be the case with Campbell Soup Company ( CPB ), which as shown below, is now trading close to its 52-week low of $44.37. In this article, I discuss the company’s recent results and why value investors may want to consider this stock at present levels.
Why CPB?
Campbell Soup Company is one of those iconic American companies with a history that dates back over 150 years. Beyond its namesake soup brand, Campbell is also home to well-known snack brands such as Cape Cod, Goldfish, Kettle Brand, Late July, Pacific Foods, Pepperidge Farm, and V8, among others. Over the trailing 12 months, CPB generated $9.2 billion in total revenue.
CPB just reported a decent fiscal third quarter amidst plenty of economic unease, with revenue rising by 5% YoY, driven by favorable price realization. Adjusted gross margin did decline by 60 basis points YoY to 31%.
This was driven unfavorable product mix that skewed towards lower margin brands, partially offset by the aforementioned price increases and supply chain improvements, and contributed to adjusted EPS declining by 3% YoY to $0.68.
Nonetheless, management reaffirmed its full year EPS guidance of $2.98 at the midpoint of range. CPB also maintains solid profitability despite the slightly lower margin during fiscal Q3. As shown below, it scores a B+ grade for profitability, with above average EBITDA and Net Income margins of 18% and 9%, respectively.
Encouragingly, CPB has realized $880 million in total savings through its multi-year initiative, inclusive of Snyder's-Lance synergies, and management noted that it's on track to realize $1 billion in total savings by the end of fiscal year 2025. Plus, snacks continue to be a key growth driver for the company, with fiscal Q3 net sales growing by 12% YoY. As shown below, CPB has 8 key snack brands that demonstrated double-digit sales growth in the last reported quarter.
Looking forward, CPB should either benefit or at least hold results steady from the current elevated inflation environment, which has caused consumers to down-trade by dining out less and eating more at home . Management noted its full value proposition to consumers during the recent earnings call :
One of the things that we did, and that difference, by the way, was primarily in our Meals & Beverage business. And one of the tactics that is working extremely well for us right now, it's going to sound a little bit like a throwback to days gone by, but the whole meal solution platform in store is a really effective tool where we're helping people through the lens of value, how do you put together a simple meal for a low price.
Meanwhile, CPB maintains a reasonable amount of leverage with a net debt to EBITDA ratio of 2.76x, sitting below the 3.0x level generally considered to be safe by ratings agencies, and supporting its BBB investment grade credit rating.
The material drop in price also makes CPB more appealing from a value perspective. At the current price of $46.08, CPB trades at a forward PE of 15.3, which sits below its normal PE of 16.2. The drop in price has also pushed the dividend yield up to 3.2%, and the dividend is well-covered by a 50% payout ratio, based on the midpoint of management's EPS guidance.
Sell side analysts who follow the company project 5% annual EPS growth over the next few years, and have a reasonable price target of $53.79 , representing a potential 20% total return over the next 12 months.
Investor Takeaway
Given its iconic brands, solid performance amidst inflation, and reasonable valuation metrics, Campbell Soup Company looks like a decent pick up for value investors at current levels. The company’s focus on cost savings initiatives should help support profitability going forward, and the 3.2% dividend yield is an added bonus for income-oriented investors. While CPB may not be the most exciting stock out there, it is a reliable name with a long history of success that could provide investors with reasonably attractive returns from its current level.
For further details see:
Campbell Soup: Buy The Drop On This Consumer Staple