Campbell Soup Stock: Stable And Uninspiring (NYSE:CPB)

In the summer of 2021, I concluded that Campbell Soup (NYSE:CPB) was kicking the can, as a boom following the Covid-19 pandemic breaking out a little over a year earlier had levelled out.

As sales fell back to historical standards, Campbell faced margin pressure amidst inflationary impacts. With earnings power still quite stable, expectations were low, in part for the right reasons.

A Recap

Ahead of the pandemic, Campbell went on a divestment spree, selling Arnott’s and the remainder of its international activities in a $2.2 billion deal. This came after the company sold its cookies business Kelsen in a $300 million deal, while it divested the Bolthouse Farms unit as well, to thereby become a domestic play on snack & meals and beverages.

Pro forma for these deals I pegged the business as generating $8 billion in sales, posting adjusted EBIT of $1.25 billion, with earnings equal to $2.50 per share. Net debt was seen at $6.1 billion, working down to a 3.7 times leverage ratio based on $1.65 billion in EBITDA. With shares trading at $42 per share pre-pandemic, the valuation was fair at 17 times earnings, given the unclear strategic direction, lack of organic growth, and leverage being apparent on its books.

As the pandemic provided a windfall to the results in the second half of its fiscal year 2020, the company ended up posting adjusted earnings of $2.95 per share to $8.7 billion in sales that year, as net debt fell to $5.4 billion. Higher profitability and lower debt made that leverage ratio fall to 3 times.

With shares trading at $50 in the summer of 2021, I found the valuation and prospects for an investment were not too compelling. Trading at a similar 17 times earnings multiple, leverage ratios fell quickly as the net debt was down to $5.0 billion, but organic growth was still hard to find, although that neutral stance could change on significant dips, of course.

Range Bound

Since voicing a cautious tone at $50 in the summer of 2021, shares actually fell towards the $40 mark by the fall of the year, only to gradually recover to a high of $57 late in 2022, now exchanging hands at $51 per share.

In September 2021, the company posted its fiscal 2021 results, a year in which sales fell 2% to $8.5 billion, with adjusted earnings actually improving three pennies to $2.98 per share. While the full year results indicated some kind of stability, the company has seen real declines in the most recent quarters, amidst the toughest comparables following the pandemic. Appeal was hard to find as the company guided for flattish results in 2020, with adjusted earnings set to fall to $2.75-$2.85 per share, with net debt reported at $5.0 billion by year-end.

Through the summer of 2022, the company hiked the full year guidance alongside the release of the third quarter results. The hike only applies to a modest increase in sales, driven by inflationary impacts, with the earnings guidance kept unchanged at a midpoint of $2.80 per share.

In September, the company posted full year results, with sales up a percent to $8.6 billion and adjusted earnings of $2.85 per share coming in a bit better than anticipated. Net debt has been cut further to $4.7 billion. The modest growth seems better than it is, with pricing of 8% (for the year) badly needed to offset a 6% decline in volumes.

For the fiscal year 2023, the company guided for a 4-6% increase in sales, which implies that sales might come in around $9.0 billion. Adjusted earnings are seen between $2.85 and $2.95 per share, indicating a few pennies of accretion at the midpoint of the range as inflation likely hurts margins.

In December, the company posted its first quarter results for 2023, with sales up 15% to nearly $2.6 billion, but more impressive was that adjusted earnings per share rose by a similar percentage to $1.02 per share. Moreover, while pricing of 16% was very strong, the volume declines only came in at 1%, with net debt stable at $4.7 billion. The results were quite solid, making that the full year sales guidance was hiked by three points to 8%, with the midpoint of the full year earnings guidance hiked by five cents to $2.95 per share.

And Now?

Fast forwarding between the summer of 2021 and today, we have seen shares trade at similar levels on both occasions. Moreover, earnings of $3 per share were quite similar in both periods of time, yet sales have grown a bit, which can entirely be attributed to inflation. Net debt has come down and is quite stable below the $5 billion mark, being quite manageable here.

Given all of this, the situation around Campbell remains as has been the case for a long time. The valuations look fair, corporate stability has returned, as debt has come down a bit. Campbell remains a stable, boring dividend yield play.

I find that the best play on Campbell is to buy on dips (like the one seen late in 2021), as I see no reason to get involved with Campbell unless growth continues in the remaining part of 2023, or shares hit their forties.