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The market’s recent surge in bullish momentum, driven by trade optimism, generally better-than-expected earnings, and lower interest rates appears to be giving investors lots of reasons to be as bullish as ever as we start the week. Monday the S&P 500 set a new all-time high, something that from a technical standpoint could mark the beginning of a fresh new surge of bullish momentum that could extend into the foreseeable future. A contrarian perspective, however, and one that I tend to which I lend credence, suggests that as the market stands to extend into year eleven of an unprecedented bull market, the bearish reversal risk remains higher than ever. That’s why stocks in the Consumer Staples sector, and Food Products industry, continue to draw my attention.
The caveat to finding stocks worth paying attention, even when you’re looking for a defensive way to diversify your stock holdings, is whether the companies you’re evaluating represent a good value under such extended, bullish conditions, or whether they actually represent increased risk. Campbell Soup Company’s (CPB) stock has been a star performer this year, increasing in value by more than 40% since the beginning of the year. A growth-oriented investor would find that performance hard to ignore; but diving into the company’s fundamentals, I think there are some important elements that signal the stock could represent a much higher risk than a lot of other stocks in its industry.
For more than a year, CPB has been contending with consumer trends that prefer smaller and more buzz-worthy (namely, “organic”) brand names; but one of the CPB’s strengths is 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. So what’s the truth – is the stock a good value, or a value trap waiting to spring? 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 $14 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined about 68%, while revenues declined almost -20%. The company’s margin profile, which has historically been vary narrow, is deteriorating; over the last twelve months, Net Income was 2.6% of Revenue, and decreased in the last quarter to -1.53%.
Free Cash Flow: CPB’s free cash flow is $1 billion over the last twelve months, and translates to a Free Cash Flow yield of about 7.23%, which is generally pretty healthy. This is also an improvement over the last year; in October of 2018, CPB’s total Free Cash Flow for the past year was $889 million.
Debt to Equity: CPB has a debt/equity ratio of 6.39, a number that 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. Liquidity could be an issue, since the balance sheet shows only $31 million versus $7.1 billion in long-term debt. Along with the company’s deteriorating Net Income, this is a big red flag that indicates the company could have problems in the quarters ahead in servicing its debt.
Dividend: CPB pays an annual dividend of $1.40 per year, which at its current price translates to an annual yield of about 3.01%.
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 $3.69 and translates to a Price/Book ratio of 12.55; this is significantly higher than the level I prefer. The stock’s 5-year average Price/Book ratio is 9.5. A rally to par with its historical average would put the stock around $35. That represents a downside risk of more than -24.5% at the stock’s current price.
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 upward trend over the past year, from a low in January at around $32 per share to its high point in October a little above $48 per share. The stock has dropped back a bit from that point and is currently hovering around near-term support in the $45 range; however if that support doesn’t hold, the stock could drop quickly to anywhere between $43 and $42 per share, which is where the 38.2% Fibonacci retracement line sits. The stock would need to break above recent resistance around $48.50 to reconfirm its bullish momentum and signal a resumption of its upward trend; but from that point, the stock could push about $5 higher, based on the distance from the last resistance break in September ($43) to the stock’s October peak.
Near-term Keys: CPB doesn’t offer a legitimate value-based opportunity, which means that I don’t think any kind of long-term position in the stock is justifiable under current market conditions. If the stock resumes its bullish momentum, however and drives back above $48.50, there could be an interesting short-term opportunity to buy the stock or work with call options, with an eye on $53 as a near-term price target. If the stock drops below support at $45, however, you might consider shorting the stock or working with put options. In that case, a bearish target around $42 would be the right exit point to take profits from a bearish trade.