As wrap up 2021 and look toward 2022, the sad and simple truth is that, no matter how much we might want to be able stop including COVID-19 and its impact on every aspect of life in our daily discussions, the health crisis hasn’t gone away, but instead is showing more persistence than any of us would have ever wanted to deal with. There are still a lot of areas of the economy that are seeing impressive signs of growth; but it also means that there remains plenty of risks that have to be considered and factored into the economic picture. For example, this week the Federal Reserve confirmed that they will end the bond buying portion of their longstanding monetary policy and are anticipating as many as three interest rate hikes in 2022 to blunt the effects of increasing inflation. That has been driven by a lot of factors that can be tied in one way or another to pandemic-driven effects, including supply chain and labor shortages that have all translated to increasing costs for a variety of goods and services in a number of industries. That includes one of the industries I tend to emphasize the most when the economy is uncertain: Food Products.
The Food Products industry is a pocket of the economy that I think makes sense to focus on 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 past couple of years 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 economic uncertainty is high, 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 keep their pantries stocked and 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. More recent earnings reports show that most of the momentum from that early surge has faded and been replaced by pricing pressures from supply chain issues and rising prices – costs that over the past couple of months have finally trickled into consumer prices.
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 the social isolation that has typified the past couple of years, 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 at the beginning of 2021 at around $54. From that point, the stock has dropped into a downward trend that finally found a bottom in September at around $40. After consolidating between $40 and $42 through most of October and all of November, the stock looks like it could be breaking into a new trend, having rallied to a current price at around $44. Are the fundamentals also strong enough to label the stock a good value? Let’s find out.
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 $13.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined -12.75%, while revenues dropped -4.44%. In the last quarter, earnings were nearly 62% higher, while sales increased by a little more than 19%. CPB’s operating profile is healthy; in the last twelve months, Net Income was 11.4% of Revenues, and 11.67% in the last quarter.
Free Cash Flow: CPB’s free cash flow is $870 million over the last twelve months. This is an improvement over the previous quarter, when Free Cash Flow was $760 million, but still lower versus 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 6.52%.
Debt to Equity: CPB has a debt/equity ratio of 1.41. 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 2018 Snyder’s-Lance acquisition. Cash and liquid assets were $69 million versus $859 million in the first quarter of this year. Long-term debt is around $4.5 billion – a number that dropped from a little over $5 billion a quarter ago, and even more significantly since the Snyder’s-Lance deal closed, when long-term debt stood at around $8 billion. The company’s operating profile and increasing cash flow are good indications that servicing their debt is not a problem.
Dividend: CPB pays an annual dividend of $1.48 per year, which at its current price translates to an annual yield of about 3.35%. 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 $58.50 per share. That means the stock is nicely undervalued, with about 27% 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 downward trend from a January peak at around $54 to its September low at around $40 per share. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After consolidating through October and November, the stock started picking up buying momentum at the start of this month, pushing the stock out its consolidation range and breaking resistance at around $42 about a week ago. The stock is now pushing close to $42, marking current support at around $43 based on pivot activity seen in late September and early October, with expected, immediate resistance sitting around $45 where the 38.2% retracement line waits. A push above $45 should find next resistance a little above $47 based on pivot low seen in April and May, while a drop below $43 should see next support at around $42 – which suggests near-term downside in this stock right now is quite limited.
Near-term Keys: CPB’s downward trend has kept most bullish-minded investors keeping the stock at arm’s length, at least until this month. The stock’s rally does seem to be presenting some interesting possibilities for short-term bullish trading set ups; a push above $45 would be a good signal to consider buying the stock or working with call options, with $47 providing a useful, short-term profit target on a momentum-based bullish trade. The stock’s limited downside, however suggests that looking for short-term, bearish trade has a very low probability of success. In the meantime, improvement in Free Cash Flow, reduction of long-term debt, and stabilizing operating margins all point to significant fundamental strength in a stock with a very attractive value proposition, which means that if you’re looking for a useful long-term opportunity in a stock with an attractive dividend, CPB could be a reasonable choice.