Campbell Soup Company
/ (CPB-NYSE)/ Equity Research / CPB | Page 8
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 03/12/2014
Current Price (12/23/14) / $44.62
Target Price / $47.00
Campbell made a robust start to fiscal 2015 with both top and bottom lines improving year over year and coming ahead of the Zacks Consensus Estimate. The bottom-line results mainly benefited from strong revenue growth along with its brand expansion and cost containment strategies. Campbell’s focus on augmenting the North American soup and simple meal business, and expanding overseas operations bode well for future growth. We believe that the company’s prudent investment and strategic initiatives toward product innovation and brand building will increase its customer base and profitability. However, we prefer to be on the sidelines because of the rising commodity costs, intense competition and exposure to foreign currency fluctuations, which may undermine the company’s operating performance. Therefore, we maintain our long-term Neutral recommendation on the stock.
SUMMARY
/ Equity Research / CPB | Page 8SUMMARY DATA
52-Week High / $46.6152-Week Low / $39.84
One-Year Return (%) / 7.07
Beta / 0.39
Average Daily Volume (sh) / 2,055,670
Shares Outstanding (mil) / 313
Market Capitalization ($mil) / $13,981
Short Interest Ratio (days) / 12.17
Institutional Ownership (%) / 42
Insider Ownership (%) / 42
Annual Cash Dividend / $1.25
Dividend Yield (%) / 2.80
5-Yr. Historical Growth Rates
Sales (%) / 2.4
Earnings Per Share (%) / 1.3
Dividend (%) / 4.7
P/E using TTM EPS / 17.1
P/E using 2015 Estimate / 18.1
P/E using 2016 Estimate / 17.1
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Low,
Type of Stock / Large-Growth
Industry / Food-Misc/Dvrsd
Zacks Industry Rank * / 174 out of 267
OVERVIEW
Based in Camden, NJ, Campbell Soup Company, together with its subsidiaries, is a worldwide manufacturer and marketer of high-quality, branded convenience food products. The company was instituted as a business corporation on Nov 23, 1922 under the laws of New Jersey. Its brands are sold in approximately 120 countries, and its principal geographies include North America, France, Germany, Belgium, and Australia. The widely-recognized brands of the company include Campbells, Pepperidge Farm, V8, Pace, Prego, Swanson, Arnotts, Kelsen, Kjeldsens and Plum Organics.
Campbell Soup reports its results of operations in 5 reportable segments:
Ø U.S. Simple Meals comprises the company’s U.S. Soup and U.S. Sauces businesses. It includes condensed and ready-to-serve soups, Swanson broth and stocks, Swanson canned poultry, Pace Mexican sauces, Prego pasta sauces, Campbell’s canned gravies, pasta and beans, and Plum Organics food and snacks.
Ø U.S. Beverages includes V8 juices and beverages, and Campbell’s tomato juice.
Ø Global Baking and Snacking includes Pepperidge Farm cookies, crackers, bakery and frozen products in the U.S.retail; Arnotts biscuits in the Asia Pacific and Australia; and Kelsen cookies globally.
Ø International Simple Meals and Beverages consists of the retail business in Canada and the simple meals and beverages business in Asia Pacific, China and Latin America.
Ø Bolthouse and Foodservice includes the company’s Bolthouse Farms carrot products, including fresh carrots, juice concentrate and fiber; Bolthouse Farms super-premium refrigerated beverages and refrigerated salad dressings; and the North America Foodservice business.
REASONS TO BUY
Ø Portfolio Change to Drive Long-Term Growth: In an attempt to enhance its brand portfolio and accelerate future growth, Campbell has resorted to acquisitions and joint ventures. As a result, the company acquired three new growth engines in fiscal 2014 including Bolthouse Farms, Plum Organics and the Kelsen Group, which provide for combined annual sales of nearly $1 billion. The trio has been performing up to the mark, contributing about one point of organic sales growth in first-quarter fiscal 2015. Further, its entry into joint ventures with Grupo Jumex and Conservas La Costena in Mexico has enhanced its manufacturing and distribution capabilities along with its presence in the global market. The company also plans to launch over 200 new products in fiscal 2015. We expect this to bring significant changes in the company’s portfolio, providing exciting new brand platforms to create value and attract new consumers, thus improving the its long-term top-line growth prospects.
Ø Strategic Initiatives to Increase Customer Base and Profitability: Campbell intends to boost its top line and increase return on investment through strategic frameworks. It made significant progress in this direction, including stabilization of the North American soup and simple meal business, overseas expansion as well as growth of the healthy beverages and baked snacks businesses. We believe that Campbell’s prudent investment and strategic efforts toward product innovation and brand building will lead to an increase in its customer base and profitability.
Ø Improving Asset Utilization: In order to optimize its asset utilization while reducing supply chain costs in the U.S., Campbell shut down a couple of its U.S.-based manufacturing units last year. The company expects this move to result in better usage of its U.S. plant network by diversifying its manufacturing capabilities, lowering total delivered costs and enhancing flexibility in its manufacturing units. Moreover, the aforementioned closures are expected to result in annual pre-tax savings of about $30 million, starting fiscal 2016. Further, with the sale of its European simple meal business for $542 million in the second quarter of fiscal 2014, Campbell has made clear its intentions to move away from its troubled canned soup business and to focus on capturing the packaged fresh food market. The additional liquidity generated from the divestment has helped the company in lowering its debt burden.
REASONS TO SELL
Ø Challenging Economic Conditions: Though food and beverage is one of the most attractive and largely profitable markets in the world, it is also the most challenging. The North American food industry has seen sluggish growth and slowdown in consumption over the last few quarters. The food industry is witnessing changes in consumer preferences (for example, toward health and wellness products) as well as spending shift toward more economical products.
Ø Rising Commodity Prices May Hamper Future Performance: The raw and packaging materials used in the company’s business include tomato paste, grains, beef, poultry, vegetables, steel, glass, paper and resin. Many of these materials are subject to price fluctuations due to a number of factors. In addition, rising commodity prices may undermine the company’s future performance.
Ø Risk of Operating in Overseas Markets: Due to its exposure in the international markets, Campbell remains prone to currency fluctuations. In the recent past Australian and Canadian dollars have weakened against U.S. dollars, thus weighing upon the company’s top-line. The company’s first-quarter fiscal 2015 sales reflected 4% growth year over year, 100 basis points lower, including foreign currency impact. Despite concluding first-quarter fiscal 2015 with strong results, the company has lowered its fiscal 2015 sales, adjusted EBITDA and adjusted earnings per share guidance, mainly to reflect the negative impact of foreign currency translation. Further, the weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside the U.S. An increase in menu price may have a direct impact on consumer demand.
RECENT NEWS
Campbell Cuts Fiscal '15 View Despite Strong Q1 Earnings – Nov 25, 2014
Campbell Soup Company made an encouraging start to fiscal 2015, with better-than-expected first-quarter results. The company’s adjusted earnings from continuing operations for the quarter increased approximately 12% year over year to $0.74 per share and came a penny ahead of the Zacks Consensus Estimate.
On a reported basis, too, the company’s earnings of $0.74 per share represents an increase of 30% from $0.57 earned a year ago.
Net sales increased 4% to $2,255 million in the quarter from $2,165 million in the prior-year quarter. Quarterly revenues also surpassed the Zacks Consensus Estimate of $2,222 million. Organic sales grew 5% year over year. During the quarter, volume and mix contributed 6% to total sales growth, partly offset by the negative impact of 1% each from currency fluctuations and higher promotional spending.
Adjusted gross margin of 34.7% declined 130 basis points (bps) from the prior-year quarter level of 36%, mainly due to cost inflation, increased promotional expenditure and higher supply chain costs, partly offset by productivity enhancements, favorable mix and benefits of lapping last year’s Plum recall.
In the reported quarter, marketing and selling expenses decreased 5% year over year to $247 million thanks to lower advertising and consumer promotion expenses. Administrative expenses fell 9% to $135 million on the back of lower long-term incentive compensation costs and cost savings related to prior-year restructuring initiatives.
Adjusted earnings before interest and tax (EBIT) increased 9% year over year to $368 million mainly attributable to the benefit of the absence of last year’s Plum recall and reduced administrative and marketing expenses, partly offset by reduced gross margin.
Segment Analysis
U.S. Simple Meals: First-quarter sales at this division increased 8% year over year to $928 million. This was mainly attributable to an increase in volume and mix. Sales for U.S. soup and Campbell’s condensed soups rose 6% each, broth sales soared 17%, ready-to-serve soup stayed flat and other simple meals grew 14%. Growth in other simple meals can be traced to increased sales of Plum, Prego pasta sauces and Campbell’s dinner sauces
Operating income rose 15% year over year to $242 million, primarily driven by volume growth, enhanced productivity and lower administrative and marketing expenses, partially offset by cost inflation and increased supply chain costs.
U.S. Beverages: Sales at this division dipped 3% year over year to $168 million due to a 2% negative impact from both unfavorable volume and mix and increased promotional spending, offset by a 1% increase in price and sales allowances. Sales gains in V8 Splash beverages were more than offset by a decline in V8 V-Fusion beverages and V8 vegetable juice.
The segment’s operating income in the quarter jumped 8% to $26 million from the year-ago period primarily driven by lower marketing expenses, offset by gross margin contraction and volume declines.
Global Baking and Snacking: This segment’s sales increased 3% to $627 million. The benefit of a 6% rise in volume and mix due to increased Arnott’s sales in Australia and Indonesia were offset by a negative impact of 1% from unfavorable currency exchange rates and 3% from higher promotional spending.
The segment’s operating income increased 15% year over year to $90 million, primarily due to volume gains, improved productivity and absence of purchase accounting adjustment related to last year’s Kelsen acquisition, offset by increased promotional expenses.
International Simple Meals and Beverages: Sales of this segment fell 2% to $189 million, as the benefit of a 6% rise in volume and mix were partially offset by a negative impact of 5% from currency translation, 1% from higher promotional expenses and 2% from accounting related costs. The segment witnessed sales decline in Latin America that fully offset the sales gain in the Asia Pacific and Canada.
The segment’s operating income fell 20% year over year to $16 million mainly due to higher marketing and administrative expenses and negative currency effects, marginally offset by volume increases.
Bolthouse and Foodservice: This segment comprises Bolthouse Farms and the North America Foodservice businesses. This division's quarterly sales were $343 million, up 4% from the comparable year-ago quarter, driven by favorable volume and mix of 4%. Volume gains reflected double-digit growth in Bolthouse Farms’ premium refrigerated beverages and salad dressings. Sales in North America Foodservice remained flat with the prior-year quarter.
Further, the company’s operating income for the quarter declined 24% year over year to $22 million due to gross margin contraction that was partly offset by lower administrative expenses and volume gains along with lesser advertising expenses for the Bolthouse Farms brand.
FY15 Outlook
Despite concluding first-quarter fiscal 2015 strongly, the company reduced the low-end of its fiscal 2015 sales, adjusted EBIT and adjusted earnings per share guidance mainly to reflect the negative impact from currency translation. However, the company retained its organic growth guidance.
Campbell now expects fiscal 2015 sales growth to range between flat and up 2% instead of the previous forecast of 1%–2% growth. Further, adjusted EBIT is projected in the range of -1% to 2% growth compared with growth of flat to 2% guided earlier.
Adjusted earnings for the fiscal are expected in the range of -1% to 2% growth compared with the previous forecast of flat to up 2%. This implies earnings per share in the range of $2.42–$2.50 compared with $2.45–$2.50 guided earlier.
VALUATION
At its current price, Campbell’s trailing 12-month earnings multiple is 17.1x compared with the 22.4x industry average and 19.1x for the S&P 500. Moreover, the stock is trading at a discount to the industry average, based on forward earnings estimates. Over the last 5 years, Campbell’s shares have traded in the range of 12.6x to 18.4x trailing 12-month earnings. Our target price is $47.00 or 19.0x of fiscal 2015 EPS.
Key Indicators
Earnings Surprise and Estimate Revision History