Yesterday I highlighted General Mills (GIS) as a stock that could offer an interesting value proposition right now. The Consumer Staples sector is starting look like a market segment that smart investors should be paying attention to right now. The market has been moving nicely since the beginning of the year, but with indications that a slowing global economy could start to carry over to the U.S., this could be a good time to start thinking about investments that can help minimize broad market risk. Food stocks are an area that I think makes sense.
Like GIS, Campbell Soup Company’s (CPB) stock has been in an extended, long-term downward trend. The stock has suffered from criticism in the media about the company’s lack of appeal to the growing Millennial demographic, whose preferences seem to point away from traditional names to smaller, more “organic” brands. It is incumbent, of course on any company to make sure their products align with consumer tastes and preferences, no matter how well-established they may be. That said, there is a lot to like about a company with the kind of name recognition and history behind it that CPB carries. Their fundamentals are generally strong, and their value proposition a few months ago was interesting; at the stock’s current price levels, it’s becoming compelling.
Smaller and more buzz-worthy (and generally more expensive at the grocery store register) brand names right now certainly have their appeal; but one of the reasons CPB is seen as a defensive stock also comes because of their ability to make their products available at cheaper prices. If the economy is actually starting to slow, more expensive, currently “sexier” products will likely be challenged to retain their sales and profits far more than better established, more affordable alternatives. Is the stock a good value right now? I’ll let you decide.
Fundamental and Value Profile
Campbell Soup Company (CPB) is a food company, which manufactures and markets food products. The Company’s segments include Americas Simple Meals and Beverages; Global Biscuits and Snacks, and Campbell Fresh. The Americas Simple Meals and Beverages segment includes the retail and food service channel businesses. The segment includes the products, such as Campbell’s condensed and ready-to-serve soups; Swanson broth and stocks; Prego pasta sauces; Pace Mexican sauces; Campbell’s gravies, pasta, beans and dinner sauces; Plum food and snacks; V8 juices and beverages, and Campbell’s tomato juice. The Global Biscuits and Snacks segment includes Pepperidge Farm cookies, crackers, bakery and frozen products; Arnott’s biscuits, and Kelsen cookies. The Campbell Fresh segment includes Bolthouse Farms fresh carrots, carrot ingredients, refrigerated beverages and refrigerated salad dressings; Garden Fresh Gourmet salsa, hummus, dips and tortilla chips, and the United States refrigerated soup business. CPB’s current market cap is $10.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined about -14%, while revenues increased almost 25%. It should be noted that the company’s margin profile, which has historically been vary narrow, has actually improved in the last quarter. Over the last twelve month, Net Income was only 1.95% of Revenue, while in the last quarter it increased to more than 7%.
Free Cash Flow: CPB’s free cash flow translates to a Free Cash Flow yield of about 8.4%, which is generally pretty healthy. CPB’s total Free Cash Flow for the past year was $889 million, a number that has declined since the last quarter of 2016, when Free Cash Flow was a little over $1.15 billion.
Debt to Equity: CPB has a debt/equity ratio of 5.65. This number makes CPB one of the most highly leveraged companies in the industry and is a result of the company’s acquisition of snack food maker Snyder’s-Lance in March of 2018. Even with the increase, their balance sheet indicates operating profits are more than sufficient to service their debt. Liquidity could be an issue, since the balance sheet shows only $205 million versus $ billion in long-term debt.
Dividend: CPB pays an annual dividend of $1.40 per year, which at its current price translates to an annual yield of about 3.95%. It should be noted that as it stands, the company’s annual dividend payout is higher than their earnings per share over the last four quarters. This is a red flag; given the company’s low cash level, high debt levels and narrow operating margins, the sustainability of the dividend has to be questioned.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CPB is $4.70 and translates to a Price/Book ratio of 7.54; this is generally above the level I prefer. More importantly, however, the stock’s 5-year average Price/Book ratio is 9.72. A rally to par with its historical average would put the stock above $45. That offers an upside of about 29% over the stock’s current price. The stock is also trading more than 40% below its historical Price/Cash Flow levels, which provides a higher long-term target price at around $49.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s 2-year downward trend, from a high around $60 per share to a trend low early last month around $32 per share. The stock has rebounded a bit from that point and is currently hovering in a narrow range between support around $34 and resistance in the $36 range. The red horizontal lines on the right side of the chart mark the stock’s Fibonacci trend retracement levels. The stock would have to break above $36 to set up any kind of short-term upward trend, with resistance around $39. If it can break above that level it could start to test the 38.2% Fibonacci retracement line around $45. On the downside, a drop below the stock’s major support level at its trend low around $32 could see the stock drop as low as $29, which is a level the stock hasn’t seen in a decade
Near-term Keys: A break above $36 could act as a good signal to enter a bullish position on this stock, working with call options or buying the stock outright. If you’re working with a short-term trade, look for an exit around $39; if you’re willing to work with a longer-term time frame, the $45 level marked by the 38.2% retracement line is a nice target. If the stock breaks down below $39, you might consider placing a bearish trade, either with shorting the stock or using put options.