2023-06-02 13:47:54 ET
Summary
- Campbell Soup Company has seen renewed operating momentum, although entirely resulting from price instead of volumes.
- The business is stable and is gradually deleveraging, as Campbell Soup Company has fortunately become a bit quieter on the corporate front.
- Appeal is improving, but amidst higher interest rates, I see no screaming appeal yet.
In February, I called shares of Campbell Soup Company ( CPB ) stable and uninspiring, as the company has re-found some rest after years of elevated activity with regard to acquisitions and divestments. With leverage under control, and Campbell performing well during the pandemic and inflationary times, I saw the situation as fair, with few immediate triggers seen for CPB shares, at the time trading in the mid-fifties.
A Bit Of Perspective
Pre-pandemic, Campbell went on a divestment spree as it sold Arnott's (Ireland department store) and the remainder of the international business in a $2.2 billion deal, it sold cookies business Kelsen in a $300 million deal, while Bolthouse Farms was divested as well. This made Campbell a pure play on snack & meals as well as beverages (again).
Pro forma for these deals, Campbell was an $8 billion business, posting adjusted EBIT of $1.25 billion and earnings around $2.50 per share. Pro forma net debt of $6.1 billion was still high with EBITDA reported at $1.65 billion, working down to a 3.7 times leverage ratio. Trading at $42 pre-pandemic, a 17 times multiple, looks largely and more than fair.
A hoarding effect during the pandemic resulted in a very strong operating performance with sales up to $8.7 billion, as adjusted earnings rose to $2.95 per share, with net debt down substantially to $5.4 billion, although comparables going forward would arguably become quite challenging.
This was seen in the fiscal year 2021 results (as released in September that year) with sales down 2% to $8.5 billion, although that adjusted earnings rose three pennies to $2.98 per share. The company guided for a small profit decline in 2022 to around $2.80 per share, yet inflationary pressures pushed the results somewhat. In the end, 2022 sales rose a percent to $8.6 billion, earnings came in at $2.85 per share, as net debt has come down further to $4.7 billion. The 1% reported growth rate looks better than it is, amidst inflationary tailwinds, as pricing of 8% masked a big underlying 6% decline in volumes.
For the fiscal year 2023, the company guided for sales to increase by around 5%, suggesting sales around $9.0 billion, with earnings seen at a midpoint of $2.90 per share. After a very strong first quarter, the company hiked the sales guidance, now seeing 8% growth, with earnings seen around $2.95 per share.
With earnings power seen around $3 per share and net debt, and relative leverage ratios coming down rather quickly, Campbell stock looked like a stable, boring dividend play in the mid-fifties. Given the prevailing interest rates I saw no reason to get involved, however, other than in a situation of a real underlying growth acceleration, or a fall of the shares to the higher forties.
Where Do We Stand?
Forwarding to June, we see shares stabilize around the $50 mark, with shares trading toward the lower end of their range. In March, the company posted second quarter results with revenues up 12% to $2.5 billion, although that this was entirely (and some more) driven by pricing and mix effects, with volumes down 2%.
Adjusted earnings rose a healthy 16% to $0.80 per share as the company hiked the full year sales guidance further, now seeing sales up more than 9%. The company hiked the lower end of the $2.90-$3.00 earnings per share guidance by five cents, putting the company firmly on track to report earnings close to $3 per share this year.
Net debt is down further to $4.4 billion, as the company makes continued progress on that front. In May, Campbell announced a small divestment, as it has reached a deal with Flagstone Foods, a manufacturer and distributor of private label health snacks, to sell its Emerald nuts business. With the deal, Campbell will see $66 million in annual sales leave the door and incur about a penny dilution to 2024 earnings per share.
While no purchase price was announced, the deal is relatively small, as the sales contribution is equal to just 0.7% of total sales of Campbell. The deal likely is valued in the tens of millions, likely not surpassing the one hundred million mark in my estimates, as it seems that this business was a bit under pressure.
And Now?
The truth is that Campbell Soup Company stock's continued operating momentum, although entirely driven by pricing (and not volumes) and a lagging share price, creates for a compelling situation. That said, a 6% earnings yield at roughly 17 times earnings seems fair in this environment in which risk-free rates come in around 5%.
Campbell Soup Company is quite defensive, but no growth is seen here. Hence, I still regard Campbell Soup Company shares as largely fair value, although I would be willing to consider CPB stock for the defensive part of the portfolio in the mid-forties.
For further details see:
Campbell Soup Stock: Focus On Execution