Still Waiting For A Better Plan From Campbell Soup

By Stephen D. Simpson, CFA | September 06, 2012 AAA

For a company with what should otherwise be a simple business, Campbell Soup (NYSE:CPB) offers up more than a few questions. Can the company stem its share losses in soup? Can the company effectively compete with the likes of Kellogg (NYSE:K) and Kraft (Nasdaq:KFT) in snacks? Does management really have a solid long-term growth strategy? How you see the answers to these questions goes a long way toward answering whether this is a good stock to own for the next few years.

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A Mediocre Close to the Year
Campbell Soup didn't seem to close the year with much in the way of encouraging momentum. Sales were reported up slightly (and just barely beat the average guess), with organic revenue up 3%. Campbell's saw what passes for decent revenue growth these days (up 3%), with price (up 3%) and promotion (down 3%) offsetting each other. Sales growth was led by the United States. "Simple Meals" business, which grew 7% on a 9% increase in soup sales. The downside, however, is that soup sales seem to have been fueled by retail buy-ins ahead of announced price increases.

When we zoom in on operating income and other margins, we see that profitability was just average. Gross margin was surprisingly weak, dropping more than a point in a quarter in which most expectations called for flat or slightly better performance. Operating income dropped 10%, with margins down in every category. Consequently, the company's reported earnings beat wasn't all that impressive in review - the company actually missed by about a penny on the operating line and the "beat" was fueled by non-operating items.

What to Make of the Year Ahead?
When thinking about Campbell's upcoming fiscal year, I'm not sure what to think. On one hand, the company is supposed to have several product introductions scheduled for the year. On the other hand, management's guidance for next year suggests organic growth (0 to 2%) below the long-run target. Although guidance may not accurately predict the future, we must remember that this is from a company where management said it's looking for "disruptive" product introductions over the next couple of years. So management is either looking to set everybody's expectations nice and low, or the company thinks that General Mills (NYSE:GIS) and TreeHouse (NYSE:THS) are going to continue to push hard on their market share.

I'm also still a little confused by the company's $1.6 billion deal for Bolthouse Farms. I see the synergies between Bolthouse's "healthy beverages" business and Campbell's existing beverages business, but I'm not sure I'd pay 10 times trailing EBITDA for a retail carrots business if I had a clear look at EBITDA, even if it is growing faster than Campbell Soup. Positioning the company for healthy living/eating is all well and good, but I'm just not sure that produce is a good place to go.

The Bottom Line
Campbell Soup is very much a work in progress, and I have to acknowledge that the company is still on better-than-decent footing. It's not as though Kellogg or Heinz (NYSE:HNZ) have clearly superior growth stories, and Campbell does have the advantage of superior returns on capital. That said, I think investors have a right to be skeptical or conservative until the company's new product introductions and overseas growth strategies really start to deliver.

Campbell Soup stock still seems more or less fairly valued. For investors who are fine with holding a solid (if unspectacular) dividend stock with some upside potential tied to better execution, this isn't a terrible choice. But for investors looking for more dynamic performance, I think Campbell Soup isn't really the right choice today.

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

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