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 – in fact, I’ve seen analysts throughout the year dismiss the industry as “boring” – 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 to be clear, even as the economy continues to reopen and more and more people talk about the end of the pandemic, at 5.8% as of the latest report, unemployment remains much higher than its pre-pandemic levels, and above the levels most economists regard as healthy in a growing economic environment – a lot of households gravitate back to those familiar brands. A big reason they have been long-established brands is 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 the past year’s economic trend has passed, reports still indicate that demand for these types of products should remain “sticky”, with stay-at-home eating expected to remain a permanent part of the average American household. The pandemic has put pressure on CPB’s supply chain, which hindered operations somewhat in the the crisis’ early stages and forced management to invest heavily to address those limitations; but those capital investments are expected to pay off in the long run in the form of greater overall cost efficiency. Another element that has played out as the economy has reopened has been an enthusiasm by consumers to eat out, and that does look like a dynamic that impact the company’s operations in the most recent quarter.
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 increased from around $40 in July of 2019 to a peak in late August 2020 at around $53. From that point, the stock has followed a mostly sideways trend, moving between highs a little above $50 to low in the $45 area. After the most recent earnings report, the stock gapped down and appears to be consolidating again in the $45 price area as of this writing. Does the drop help to improve the stock’s value proposition? And if so, do the company’s underlying fundamentals offer strength to notion that CPB is a smart defensive stock to work with right now? Let’s take a look.
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 $13.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined -31.33%, while revenues dropped 11.35%. In the last quarter, earnings were -32% lower, while sales slid about -13% lower. Both declines can be attributed to inflationary conditions that have arisen in the company’s supply chain, as companies throughout the industry have been hampered by labor shortages (started by pandemic-driven restrictions on capacity). As demand increases, companies in this industry are finding it difficult adding personnel to keep up, which limits productivity and further restricts supply. 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 9.18%, but decreased to 8.06% in the last quarter. This is also a reflection of the supply chain issues just described. Management has stated they expect these issues to normalize in the months ahead, and so I believe this deterioration will be a temporary effect.
Free Cash Flow: CPB’s free cash flow is $875 million over the last twelve months. This is a big declined from the last quarter of 2020, when Free Cash Flow was about $1.1 billion. The current number translates to a Free Cash Flow yield of 6.38%.
Debt to Equity: CPB has a debt/equity ratio of 1.67. 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. Cash and liquid assets were $209 million versus $859 million six months ago. Long-term debt is around $4.9 billion – a number that has dropped significantly since the Snyder’s-Lance deal closed and long-term debt stood at around $8 billion.
Dividend: CPB pays an annual dividend of $1.48 per year, which at its current price translates to an annual yield of about 3.27%. Management also increased the dividend from $1.40 per year at the beginning of 2021, reflecting their confidence in the business in the months and years ahead.
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 $58 per share. That means the stock is significantly undervalued, with about 29% upside from its current price. It is worth noting, however that at the end of 2020 this same analysis yielded a Fair Value target at around $62.
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 plunge in August 2020 from a high at around $54 to a low point at the start of September at around $44.50. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock hasn’t been able to maintain a consistent upward or downward trend since that drop, but instead has moved from that low point to occasional, short-term peaks at around $50 on multiple occasions. That stock is currently just a little above its 52-week low point, and appears to be consolidating at that support level. A drop below $44.50 could see the stock fall to about $41, based on the distance covered by the overnight drop earlier this month that pushed the stock out of a narrowing consolidation range a little below $50. Immediate resistance is around $46. A push above that level should see the stock test next resistance at around $48 where the 38.2% retracement line sits.
Near-term Keys: CPB’s plunge since its last earnings report has most bullish-minded investors running for the exits, while it has value-oriented investors like me taking notice. The problem is that there are some fundamental concerns that make the value proposition look a bit like a trap. I would prefer to see Free Cash Flow as well as Cash increasing, with improvement in Net Income to Revenue to justify the stock’s current value proposition. CPB is a stock that is a bit difficult to use for short-term trading strategies like swing or momentum trades; even so, a push above resistance at $46 could offer an interesting bullish opportunity by either buying the stock or working with call options, using $48 as an initial profit target with additional upside to about $50 if bullish strength remains healthy. A drop below $44.50 could act as a signal to consider shorting the stock or working with put options, with the stock’s bear market low around $41 offering an interesting bearish target point.