It's hard to run too hot or cold on Campbell Soup (NYSE:CPB). It has typically been a pretty conservatively-run company and many of its brands are virtually iconic. That said, management has been making some unusual decisions of late – promotional spend has seemed erratic, the company does not appear to be supporting Pepperidge Farms enough, and acquisitions of organic baby food and retail carrots are head-scratchers. Campbell Soup isn't unusual in being a somewhat expensive-looking packaged food stock, but this isn't a stock I'd pay up to own.

Earnings Weren't Great, But Maybe Better Than Reported
Campbell's fiscal fourth quarter wasn't all that great, but it was a little better than readers may first think. It would seem that several articles are running with the idea that Campbell Soup really missed on the top line, when in fact the results were basically right on target – many analysts had not taken the company's intended sale of the European Simple Meals business into account as a discontinued operation.

Reported sales from continuing ops rose 13% for the quarter, though organic sales growth was just 1% on a 1% improvement in volume. U.S. Simple Meals saw sales rise 4% on a 5% improvement in volume, with the core soups business up 4% and basically consistent with Nielsen data. Baking/Snacking rose 3% on a 4% volume improvement, while the non-discontinued portion of International Simple Meals fell 7%. U.S. Beverages were down another 4%, on a 4% decline in volume.

Margins were pretty mediocre. Gross margin fell more than two points on an adjusted basis, while adjusted operating profit rose 2%. All told, Campbell Soup would have missed this quarter if not for the benefit of lower taxes.

Buying Growth, But Can They Maintain It?
Prior to this quarterly financial report, Campbell Soup announced the acquisition of the Plum brand of organic baby food. Plum is a fast-growing player in the organic baby food space with its pouch format (sales reportedly up 200% over the last year), but the company spends heavily on promotions. Campbell management hasn't offered up much detail about the profit structure of Plum, but a lot of industry participants seem to think its unprofitable.

I'm curious to see what Campbell Soup thinks it can bring to the business. Certainly there is the opportunity to leverage Campbell's huge retail distribution, and probably ample manufacturing leverage as well. On the other hand, I'm not sure Campbell will want to maintain the same level of promotional spending and it will be interesting to see how sales adjust in response. It's also well worth noting that Campbell Soup is now going head to head with Nestle (Nasdaq:NSRGY) and Hero Group (owner of the Beech-Nut brand), and Nestle in particular is a very strong competitor in baby food (with its Gerber brand).

A Lot Of Unknowns For A “Boring” Stock
There are a lot of other relevant unknowns to Campbell at this point. I still find the Bolthouse acquisition to be a questionable one, particularly as the company has not yet been able to turn around the V-8-based beverage business. What's more, management would likely be doing itself (and shareholders) a favor by adding some clarity to its plans for the proceeds of the European divestiture.

I also think the company may be playing it too cautiously with Pepperidge Farms. This business has been doing quite well against Mondelez (Nasdaq:MDLZ) and Kellogg (NYSE:K) in both cookies and snack crackers, and I'd like to see the company leverage that growth better. I think Campbell should be positioning this brand more aggressively (particularly in markets like China), though I will say the brand/product extensions (like Goldfish Mac and Cheese) are a good move.

The Bottom Line
I wasn't all that fond of Campbell Soup's stock at the end of the last quarter, and it did underperform the market, though not really by a significant degree relative to the packaged food sector (though specific rivals Mondelez and General Mills (NYSE:GIS) were stronger. I see nothing with this quarter to change my general “meh” point of view on the shares. It's a decent enough consumer-oriented dividend stock, I suppose, but with weak exposure to non-US markets and a corporate strategy that doesn't make a lot of sense to me, it wouldn't be my first choice.

Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.
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Tickers in this Article: CPB, MDLZ, K, NSRGY

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