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Buying CPB may not sound sexy – but it is still a terrific value

In the last three months since the market hit a bear-market bottom, we’ve seen a number of stocks rally from extreme lows to new highs. A lot of the buzz is around companies that facilitate work-from-home business operating models or encourage other activities that make self-isolation and the social restrictions associated with living through a pandemic easier. That means that stocks like Zoom Video (ZM), Shopify (SHOP), and (AMZN), to name just a few, have gone parabolic, emerging from those bear market lows to push to extreme new highs that in some cases have more than doubled the value of those shares.

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You can argue whether those stocks moved too far, too fast, but the fact is those kinds of extraordinary results will shift a majority of the popular discussion about the market to those stocks. But pandemic conditions offer a lot of different storylines about how you can keep your money working for you; some just aren’t as sexy as others, because their business isn’t disruptive to an existing industry, or because the company has a long history as an American staple.

I have written quite a bit about how I like to pay attention to stocks in the Food Products industry when market conditions become more uncertain and broad volatility starts to increase. That’s because while the industry itself can hardly be described as disruptive, the truth is that demand for food doesn’t go away. Consumer trends during periods of economic expansion and extended bull markets often tend to pull away from the established, “traditional” names and brands we’ve all grown up with, but when unemployment is high (and even with this week’s latest report moving the needle in a positive direction, it is still above 11%) and uncertainty remains about how quickly economic activity will pick up again, a lot of households gravitate back to those familiar brands – because they have been long-established brands due to the fact that they offer good value. They may not be disruptive in their industry, or all that exciting, but they do make it easier for parents to stock their pantries and keep their kids fed.

The earliest phases of the pandemic saw a big shift to some of these stocks, like Campbell Soup Co. (CPB), as families responded to initial shutdown and shelter-in-place orders by stockpiling and building up food storage in their homes. That meant that prepackaged, easy-to-prepare food products, that can be stored for extended periods and stay good were immediately more attractive than they had been in some time. And while it’s safe to say that most of the stockpiling component of this year’s economic trend has passed, reports still indicate that demand for these types of products remains high. CPB, for example is still reporting a 15% increase in sales versus the same period last year, when popular opinion was that CPB was outdated and out-of-touch with the Millennial generation and its buying preferences. 

CPB is 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 we can think of as “comfort foods” for social isolation, like Kettle brand potato chips, Goldfish crackers, and Pepperidge Farm cookies. That has helped them broaden their appeal away from just the soup aisle to other areas of your grocery store that is likely to keep them relevant and important. I think it’s also a reason that, while most analysts would still call CPB’s stock “boring,” the price has increased from around $40 in July of 2019 to its current level near $50 per share. True, that isn’t double or triple its value like some of the stock I mentioned at the top of today’s article; but let’s face it, a 25% gain on the back of improving consumer trends that have strengthened the company’s balance sheet, and have also boosted the stock’s Fair Value target enough that there still appears to be plenty of room to grow should be enough to make CPB an interesting stock to pay attention to.

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 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased about 48%, while revenues rose 2.75%. In the last quarter, earnings were about 15.25% higher, while sales grew by 3.5%. Those numbers mark an important reversal from earlier this year, when earnings and revenues were showing decreases over a twelve-month and quarterly basis. CPB’s operating profile is healthy, but like many stocks, pandemic conditions have had a deteriorating effect. In the last twelve months, Net Income was 18.34%, but decreased to 7.51% in the last quarter. What is the cause, if trends are moving in CPB’s favor? Indications are that, while sales for CPB’s products have picked up, grocer’s inventory isn’t keeping up even as consumer have moved from stockpiling mode to maintenance mode. This is a trend that CPB expects to normalize in the months ahead, and so I believe the last quarter’s deterioration to be a temporary effect.

Free Cash Flow: CPB’s free cash flow is $2.5 billion over the last twelve months. This is a big increase from earlier this year, when Free Cash Flow was about $860 million. The current number translates to a Free Cash Flow yield of 16.75%.

Debt to Equity: CPB has a debt/equity ratio of 2.01. 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 has improved dramatically in the last quarter, to $1.2 billion versus only $58 million at the beginning of the year.  Long-term debt is a little less than $5.2 billion – a number that increased slightly in the last quarter but is also down significantly since the Snyder’s-Lance deal closed and long-term debt stood at around $8 billion.

Dividend: CPB pays an annual dividend of $1.40 per year, which at its current price translates to an annual yield of about 2.84%.

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 $63 per share. That means the stock remains nicely undervalued, with about 28% upside from its current price. It is also worth mentioning that before the stock’s latest earnings data, my Fair Value target was a bit lower, at around $61 per share.

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 point in July 2019 at around $40 per share to its high point in March at nearly $57 per share. It also provides the baseline for the Fibonacci retracement lines shown on the right side fo the chart. The stock plunged from that high to a low around $42 in the last week of March before bouncing aggressively higher again to revisit highs in the mid-$50 range. Over the last month, the stock’s volatility has shrunk, leading to a tightening of its trading range, with immediate resistance at around $51 and support at around $47 per share. A drop below the 61.8% retracement line, which is just a bit below $47 could see downside to the $42 range, near to the stock March, bear market bottom. A break above $51 should see the stock rally in the near-term to its May peak at around $53.50, with additional upside near to the extreme peak around $57.50, or possibly to test my Fair Value target around $63 if bullish momentum remains strong.

Near-term Keys: CPB’s decreasing volatility over the past month make the stock less interesting to thrill-seekers and speculators who are looking for a fast buck and immediate gratification; the truth is that CPB is not a stock that is going to grab anybody’s attention in that kind of way. Even so, a push above resistance at $51 could offer an interesting bullish opportunity by either buying the stock or working with call options, using $53.50 as an initial profit target with additional upside beyond that point if bullish strength remains healthy. A drop below $47 could act as a signal to consider shorting the stock or working with put options, with the stock’s bear market low around $42 offering an interesting bearish target point. What about value? I think the company’s broadly improving fundamentals are strong enough to make  the stock’s value proposition worth paying attention to.

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