Filed Under:
Tickers in this Article: CPB, PEP, K
Campbell Soup (NYSE:CPB) recently announced that its Q4 profit jumped 38.6% to 16 cents per share from 11 cents one year ago. The market, however, was expecting more.

After the announcement there were more jeers than cheers, and shares of the company were sent down about 3.5%. While there were some concerns from the company, I think that, upon closer inspection, Campbell is on solid ground. (For more on how missed expectations can send a stock spiraling, check out Surprising Earnings Results.)

The Mmm Mmm Bad
If you own any stock, you should typically hope that analysts on Wall Street have high expectations for the company. These are some of the brightest people in the business, and when they cover a company, they tend to know it almost as well as the company's own management.

Obviously, if you see the analysts projecting very strong growth, it is a good thing. However, you also have to hope that they don't expect too much, because even with very solid earnings growth, the stock will pull back if it misses those analyst estimates. This is exactly what happened in this case.

That is a short-term concern, though, and should regulate given some time. The company is trading at price-earnings (P/E) of around 17, which is not a valuation that would warrant the drop in my eyes. A true concern is that earnings from continuing operations dropped 26%, which does not include operations that were sold in the last year. (For more insight, check out the P/E Ratio Tutorial.)

Campbell's fourth quarter also contained a 15% increase in marketing and selling expenditures, while seeing overall sales of its soup decline. The company revised earnings guidance for the year that was also below analyst expectations. Don't read too much into that though, as companies often seem to use this to try and manage Wall Street expectations by guiding down.

Analysts Too Optimistic
I still think the company looks good going forward. After 37% profit growth in the first quarter, and 38% this quarter, I am happy with the growth and I think it will continue. The company has strong brands through its condensed and microwavable soups, V8 juices, Goldfish crackers and more. And obviously, winter is a good time to sell soup.

I believe that analysts may have been a little too optimistic with their growth estimates for the summer. While V8 and Goldfish did well, how much do you think you can increase demand for soup during the hot summer months? The company's P/E sits at around 17, and combined with its growth potential, this signals to me that the company is good buying prospect at this point. Other processed and packaged food companies like Pepsico (NYSE:PEP), and Kellogg's (NYSE:K) trade at 19-times and 20-times earnings, respectively.

There remains considerable systematic risk in the market right now, which is a concern, but I think that given this company's growth, holding for the long-term will likely have its rewards.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

comments powered by Disqus

Trading Center