Years ago, as I began my career in the investing world, I was introduced to a book written by famous mutual fund manager Peter Lynch, One Up on Wall Street. In it, Mr. Lynch outlined some of the methods he used to identify the stocks that helped him build the Fidelity Magellan Fund into the largest, best-performing mutual fund in North America in the 1970’s and 1980’s. One of the things I liked best about his approach was the common sense method he used to start building a watchlist. He’d look around his house at the products he used the most frequently, but that most of us really tend to take for granted. Dish soap, household appliances, personal hygiene products, and other household essentials helped him start to build a list of stocks to begin his analysis. That mindset has helped me simplify the way I begin filtering through the thousands of stocks that make up the U.S. stock market ever since.
Last week, I was running our weekly errands, armed with a shopping list from my wife. COVID-19 has changed the way we have to do things, and that includes a lot of things that I think most of us have always taken for granted – including normally pedestrian activities like grocery shopping. For us, that means that my wife, who is currently immunocompromised, has to stay home and trust that I can take care of it by myself – which admittedly, isn’t a given.
Using the pages-long list she gave me, I walked up one aisle and down another, sometimes having to double back to aisles I had already been on because I frankly don’t know how the store categorizes and organizes everything we buy. For my wife, self-isolation is problematic, because she is a social animal, and frankly needs to be able to see and interact with people. Maybe that’s why I spent a lot of time this last week on the snacks aisle, coming home with several bags of chips and salty snacks to go with cookies and other sweets, all of which I’m confident represent a way for my wife to cope with her current reality.
I was reminded of Mr. Lynch’s book this week when I started to review Campbell Soup Co. (CPB), a stock that I’ve followed for quite some time and used on a few different occasions over the last couple of years for different, useful trading opportunities. In late 2018, CPB finalized the acquisition of snack food company Snyder’s-Lance, bringing into their brand portfolio some of the products that I brought home for my wife, like Kettle brand potato chips, Goldfish crackers, and Pepperidge Farm cookies. In fact, during my shopping trip I took note of the soup aisle, where a few months ago traditional packaged foods like Campbell’s Soup – yeah, the canned stuff that many of us grew up on – had apparently fallen out of favor with the Millennial generation, who experts were saying preferred trendier, more expensive and organic choices. Now, as COVID-19 has pushed a lot of those young parents with kids to feed, and jobs in a precarious, uncertain state (or worse, without jobs at all), many of those previously out-of-favor items were now very much in demand; I felt fortunate to be able to get enough to fill that portion of my wife’s shopping list.
CPB is a stock that, until the beginning of this year, would probably be categorized as boring – it just didn’t move very much, either up or down. However, as economic uncertainty has increased, the stock has become significantly more volatile, widening its range between highs and low from from just a couple of dollars in the latter part of 2019 to around $10 to $11 per share. The stock hit a fresh, new 52-week high around $57 per share before plunging with the rest of the market to about $41 before the end of that month. From that point, the stock has experienced what I’m starting to refer to as a “stockpiling effect,” and which a lot of stocks in the Food Products industry have experienced in the last month. As reports have come in that many of these companies are actually seeing an increase in demand as consumers look to build up their home storage of basic supplies, the market has flocked into many of these stocks, including CPB; as of this writing, the stock is sitting at around $50 per share.
Does that push higher mean the stock is done? I’m not so sure; new indications suggest that self-isolation and social distancing measures may remain in place into the summer months, and I believe that the eventual economic recovery that will come as businesses finally do begin to open and resume normal operations will take longer. While the “stockpiling effect” I referred to will probably fade at some point, I think that demand for a lot of these more traditional and affordable brand names will remain healthy. CPB’s fundamental strength underscores a value proposition that I have to admit is actually better than I expected it to be right now, and that means that even for a conservative, value-focused investor, this might be an interesting stock to keep track of right now. Let’s dive in to the numbers.
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 $15.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined about -7%, while revenues declined -20%. In the last quarter, earnings were about -7.6% lower, while sales were about -1% lower. Despite the unfavorable earnings pattern, CPB’s operating profile is healhty and strengthening, which marks a remarkable reversal from its pattern as recently as November of 2019. In the last twelve months, Net Income was 17.46% and increased in a big way to 55.8% in the last quarter.
Free Cash Flow: CPB’s free cash flow is $867 million over the last twelve months. This is a bit lower than it was in July of last year, when Free Cash Flow was about $1 billion. The current number translates to a Free Cash Flow yield of 5.73%.
Debt to Equity: CPB has a debt/equity ratio of 1.97. which indicates the company is highly leveraged. This isn’t especially unusual for the industry, and most of the company’s debt load is attributable to the Snyder’s-Lance acquisition. Liquidity could be an issue, since the balance sheet shows only $58 million in cash and liquid assets versus $4.9 billion in long-term debt. It is noteworthy that, despite the minimal cash number, it has increased from just about $31 million in November of last year. It also should not go unnoticed that long-term has dropped even more significantly; it was around $7.1 billion just a few months ago. Along with their impressive shift in their operating margins, these are useful improvements that bode well for the future.
Dividend: CPB pays an annual dividend of $1.40 per year, which at its current price translates to an annual yield of about 2.8%.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $61.44 per share. That means the stock remains nicely undervalued, with about 23% upside from its current price.
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 upward trend over the past year, from a low in June at around $35 per share to its high point in March at nearly $57 per share. The stock plunged from that high to a low around $42 in the last week of March before bouncing aggressively higher again, and is now forming a short-term upward trend pattern. Current support is around $49, inline with the 38.2% Fibonacci retracement line and with previous resistance in December and January. Given currently volatility, a drop below that level could see the stock fall to about $43 before finding new support; however if the stock’s volatility begins to return to norm, it should be in the $45 to $47 range. Immediate resistance is around $53, with further upside possibly to $57 if bullish momentum continues.
Near-term Keys: CPB’s volatility over the past month and a half is so dramatically different from its historical norm that it would make most investors that might be interested in this stock pretty nervous; but the fact is that the stock offers and very intriguing combination of improving fundamental strength and useful value to go with broad market sentiment. I expect the market’s recent bullish push, propelled on the hope that we might be nearer the end of current self-isolation and social distancing measure, may be premature. We’re just starting to see some practical economic reports reflective of the impact this pandemic has had so far, and if that pushed the market back toward its March lows, don’t be surprised to see Consumer Staples stocks like CPB and other names in the Food Products industry to continue standing out from the rest. I actually don’t like the idea of trying to use CPB for any kind of short-term, momentum-driven, option-based trading strategies right now; the stock’s increased volatility means that prices on both call and put options are artificially inflated. That increases the risk that if the stock’s volatility drops in the near term, option prices will deflate and make those strategies harder to use in a practical fashion.