Halfway through the year, I think it’s safe to say that 2022 has been a mixed bag for most investors, no matter what approach to the markets you take. Turns to bear market conditions tend to do that in general, which is why it can be hard to find good ways to protect your money and keep it working for you at the same time.
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. When fear of recession increases, which is where I think a lot of people are now, I think stock in defensive industries like Food Products begin to make even more sense. 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 simply 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 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 when household budgets start to tighten. 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 last couple of years have seen a big, pandemic-driven shift to some of these stocks, like Campbell Soup Co. (CPB), as families responded to government-mandated restrictions 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. In the last year or so, earnings reports show that most of the momentum from that early surge has faded and been replaced by pricing pressures from supply chain issues and rising prices – costs that have also trickled into consumer prices as companies are forced to pass their ring costs further down the line.
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”, 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 are likely to keep them relevant and important and offer better opportunities for growth. I think it’s also a reason that, while most analysts would still call CPB’s stock “boring,” its price has been pretty resilient this year, rising about 12% year-to-date while stocks in a lot of other industries have dropped to their own bear market levels. The stock dropped from a 52-week high at around $52 in May to a recent low at around $45, but has picked up new, bullish momentum to now generate a technical buy signal that fits a lot of growth-oriented strategies. The thing I find interesting is that buy signal also comes on a stock that still offers an attractive value proposition on the back of a generally healthy set of fundamental metrics. 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 $14.6 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 22.81%, while revenues were 7.36% higher. In the last quarter, earnings rose more modestly, at 1.45%, while sales declined by -3.58%. CPB’s operating profile is healthy, but also reflects the current economic challenges associated with inflation; in the last twelve months, Net Income was 11.23% of Revenues, and declined to 8.83% in the last quarter.
Free Cash Flow: CPB’s free cash flow is healthy, at $991 million over the last twelve months. This is an improvement over the previous quarter, when Free Cash Flow was $918 million, and over the last year, from $760 million. The current number translates to a Free Cash Flow yield of 6.76%.
Debt to Equity: CPB has a debt/equity ratio of 1.18. 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 $196 million versus just $69 million in the first quarter of this year. Long-term debt is around $4 billion – a number that dropped from a little over $5 billion at the end of 2021, 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, increasing cash flow and improving liquidity 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 3.05%. 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 $57 per share. That means the stock is nicely undervalued, with about 18% 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 from a November low at around $40 to its May peak at around $52 per share. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock dropped off of that high as the broad market became more bullish in May, but found support at around $45 in mid-June, right around the 61.8% retracement line, and then broke above the 38.2% retracement line before the end of June. The stock has been tracing upward on a gradual basis from that point, which further establishes the $47 level where the 38.2% retracement line sits as current support, with expected, immediate resistance at around $50, and $52 if buying activity increases. A drop below $47 should have limited downside, to about $46 based on pivot activity in that price area in May and June as well as mid-January.
Near-term Keys: CPB’s upward trend has the stock diverging from the rest of the market right now, which isn’t too surprising when you consider that as the market has turned more bearish investors have been looking for conservative, “safe haven” type of places to put their money. Even so, the stock still offers a value proposition that I think is attractive enough for a conservative bargain hunter. If you prefer to work with short-term trading strategies, the stock’s latest push above resistance at around $47 could offer an opportunity to buy the stock or to work with call options, with $50 providing a useful, short-term profit target on a momentum-based bullish trade, and the stock’s 52-week high at around $52 possible if buying activity increases. The stock’s limited downside, however suggests that looking for short-term, bearish trade has a very low probability of success.