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Despite a bumpy ride that pushed the stock 5% higher and then more than 20% down within a three-week period after Q2-2020 earnings were released, the Campbell Soup Company (CPB) is, at the time of this writing, trading at nearly 10% up from the pre-earnings level.
Source: Seeking Alpha
With about a week to go before Q3 earnings are out, it’s time to look at this recession-resilient company to see if it’s worth investing at the current price.
Spoiler: There are several factors that appear to support a bull case for CPB.
Q2-2020 Revenue Analysis
The first of these is the company’s recent revenue trends. Q2 revenues were lackluster as the company experienced zero growth in net sales. Its reorganized reportable segments trended relatively flat, which reflected at the top line.
Source: CPB Q2-2020 Earnings Report
It is of note, however, that there’s been some momentum in the Snacks segment in terms of volume and mix, as the table above shows. While this is no indication of a possible future trend in revenue growth, it does appear that Campbell retained some pricing advantage moving into the third quarter, when the impact of the novel coronavirus pandemic and stay-at-home orders will have been the greatest. Validation for that assumption comes from the latest IRI retail sales data, which reportedly shows that snack foods in the U.S. have been enjoying high demand since early March. The 2% organic growth in Campbell’s Snacks division is from the pre-lock-down and pre-stay-at-home era, and I believe that it will have received a significant boost in the third quarter. The segment represented roughly about 43 to 44% of overall revenues for the six months ended January 26, 2020, so it will have a positive impact on Q3 revenues.
The Meals & Beverages division is also expected to show strong revenue increases in Q3-2020 on the back of news that consumers across the United States are stockpiling “powdered milk and cans of soup,” among other essentials. Campbell’s Meals & Beverages line-up includes:
Campbell’s condensed and ready-to-serve soups; Swanson broth and stocks; Pacific Foods broth, soups and non-dairy beverages; Prego pasta sauces; Pace Mexican sauces; Campbell’s gravies, pasta, beans and dinner sauces; Swanson canned poultry; Plum baby food and snacks; V8 juices and beverages; and Campbell’s tomato juice.
Trends also indicate that a much higher percentage of people are cooking at home.
Source: FoodNavigator-USA
More than half of the people surveyed by HUNTER say they will continue cooking at home even after the coronavirus threat recedes.
So, we’re essentially looking at across-the-board revenue growth indicators for Campbell’s reportable segments, which is indicated by the multiple revenue and EPS revisions that I talk about in the next section.
EPS and Revenue Revisions
Another validator for the bull case is the number of upward EPS and revenue revisions by analysts over the past 90 days, which currently stand at 9 and 8, respectively, per data from Seeking Alpha. Both short- and long-term trends indicate that analysts have become increasingly bullish on the company’s revenue and earnings.
The current EPS estimate for the fiscal year ending June 2020 is +13% over the prior period. Revenue estimates for the same period are at +7%, and I think we’ll see both these expectations being played out starting in Q3.
Given the fact that CPB is now on a nine-quarter beat streak on both revenues and earnings, it bodes well for investors eyeing the stock at this current level.
Relatively Strong Financials
The company’s balance sheet numbers don’t indicate any unusual problems. Long-term debt is under control, coming down from over $7 billion in Q2-2019 to under $5 billion in Q2-2020. Much of the debt reduction was achieved in the first two quarters of the fiscal year 2020, as indicated in the Q2-2020 earnings report:
We completed the sale of the Arnott’s and other international operations on December 23, 2019, for $2.286 billion, subject to customary purchase price adjustments. We used the net proceeds from the sale to reduce our debt through a series of actions. On December 31, 2019, we repaid the $100 million outstanding balance on our senior unsecured term loan facility. On January 22, 2020, we completed the redemption of all $500 million outstanding aggregate principal amount of our 4.25% Senior Notes due 2021. On January 24, 2020, we settled the tender offers to purchase $1.200 billion in aggregate principal amount of certain unsecured debt, comprised of $329 million of 3.30% Senior Notes due 2021, $634 million of 3.65% Senior Notes due 2023, and $237 million of 3.80% Senior Notes due 2042. The total consideration for the redemption and the tender offers was $1.765 billion and the total carrying amount of the purchased notes was $1.691 billion, resulting in a loss of $75 million (including $65 million of premium, as well as accrued fees and other costs associated with the tender offers) which was recorded in Interest expense in the Consolidated Statement of Earnings. In addition, we paid accrued and unpaid interest on the purchased notes through the dates of settlement. The net divestiture proceeds remaining after these debt reduction activities were used to reduce commercial paper borrowings.
Source: MacroTrends
Campbell is in a good position to service its financial obligations and leverage even more if the opportunity for a significant acquisition comes along.
Investor’s Angle
The company’s growth prospects, as well as financial metrics, appear to be strong as CPB goes into the second half of FY-2020. In terms of valuation, the forward price to earnings ratio and price to sales ratios appear to be in line with those of its peers, generally speaking.
Considering the growth runway ahead and the financial stability this company has shown in the periods discussed, it seems like an attractive buy for investors at the current (as of this writing) price of under $50. But be ready to hold the stock for the long term; the market is still volatile enough to give you shockers on trending news, and any negative news moving forward could hit the stock and send it sliding down, as it did around mid-March this year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
