Campbell Soup Still More "Ho Hum" Than "Mmm Mmm"

By Stephen D. Simpson, CFA | November 21, 2012 AAA

It's largely understood that established packaged/processed food companies are not exactly growth titans. As a result, investors who look at Campbell Soup (NYSE:CPB) as a part of a portfolio of dividend-paying bond alternatives may not be all that put out by the company's sluggish performance. Investors more focused on total returns, however, may need to see more evidence that Campbell Soup management has a real plan to reinvigorate growth before buying these shares.

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A Pretty Blah Beginning to Fiscal 2013
Although Campbell Soup didn't disappoint this quarter, management isn't giving investors much to get excited about either. At a minimum, there seems to be some confusion as to how the company is going to back up what are supposed to be disruptive new product launches and reignite existing lagging brands.

Revenue rose 8%, as reported, but virtually all of the growth was bought in through acquisitions. For the first fiscal quarter of 2013, Campbell Soup's revenue saw organic growth of just 1% on flat volume. The U.S. soup and sauces businesses increased 2 and 4% respectively. Snacks and baking were up 1%, while the international meals and beverage business saw revenue slip more than 1% as reported.

Margins were pretty mixed. Gross margin actually weakened by about 160 basis points (BPs), due in large part to the lower margins of the acquired Bolthouse businesses. Campbell Soup did report adjusted operating income growth of about 5%, but this was helped by a decline in advertising spending.

SEE: How To Decode A Company's Earnings Reports

Will Promoting Through Price Move Product?
I've had a hard time getting a good hold on just what Campbell Soup is trying to do with its marketing and promotional strategy. I understand that competition from store brands and private label food companies like TreeHouse Foods (NYSE:THS) has changed the dynamics of the business. I also understand that companies like Heinz (NYSE:HNZ) and Smucker (NYSE:SJM) are moving away from active advertising in favor of discounts and allowances.

Even still, Campbell is supposed to have a lot of new products hitting the shelves over the next year or two, and new products don't sell themselves. Apart from a mocking segment on The Colbert Report, I haven't seen much about Campbell Soup's new products (and product packaging), and I wonder if preserving margin at the cost of volume growth is a good trade when it concerns new products. At the same time, I'm not sure how lighter marketing spend is going to help get the V8 brand family back on track.

Prepare for More Sluggishness?
I'm a little nervous about the near-term outlook for Campbell Soup. Soup revenue was up just 2% this quarter, due in part to the impact of buy-ins in the prior quarter. Although Nielsen data suggests that Campbell Soup is hanging on relative to General Mills (NYSE:GIS), it sounds like consumer takeaway is soft, and that could be an issue for the next quarter.

I'm also concerned about the slow pace of growth in the snack business. Kellogg (NYSE:K) and Mondelez (Nasdaq:MDLZ) have gotten more serious about their snack segments, and it has frankly become an area that almost every packaged food company is targeting as a growth opportunity.

SEE: America's Biggest Food Companies

The Bottom Line
Were it not for the company's existing debt, I would think that a play for a company like Hain Celestial (Nasdaq:HAIN) or Hostess could offer a lot of benefits. As it is, however, I think the bulk of Campbell Soup's improvements are going to have to come from within. With its strong market share, the soup business is a good source of potential improvements, and I likewise think there are product innovation/introduction opportunities in the snack business.

I think there's little to worry about in terms of Campbell's cash flow and dividend support - so to the extent that investors are interested in Campbell Soup for those dividends, that all looks fine. In terms of the total return, though, I'm not so excited. Unless an investor believes that Campbell Soup can grow cash flow faster than 4 to 5% over the long term (which would require substantially above-trend revenue growth and/or free cash flow (FCF) conversion), the shares just aren't all that compelling today.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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