CPB could be an interesting value play

July 17, 2018

CPB could be an interesting value play

The Consumer Staples sector is segment of the economy that has underperformed the rest of the stock market, at least until the last few weeks. Trade tensions seem to be one of the primary factors right now that have increased uncertainty enough to prompt investors to start paying more attention to industries that fit into a more “defensive” economic profile, which means that stocks like Kroger Company (KR) and General Mills (GIS) in the Food Products industry, and CVS Health Corp (CVS) and Walgreens Boots Alliance, Inc. (WBA) have been getting a little more attention. CPB is another stock in the Food Products industry that is offering some pretty attractive opportunities right now.

Like GIS, Campbell Soup Company’s (CPB) stock price suffered from criticism in the media about the company’s appeal to the growing Millennial target demographic, whose preferences seem to point away from traditional names to smaller, more “organic” brands. The concern is warranted, as it is incumbent on any company to make sure their products align with consumer tastes and preferences, no matter how well-established they may be. That said, there is a lot to be said for a company with the kind of name recognition and history behind it that CPB carries. Their fundamentals are quite strong, and their value proposition is more interesting now that it was just a couple of months ago. 

Smaller and more buzz-worthy (and generally more expensive at the grocery store register) brand names right now certainly have their appeal; but one of the reasons CPB is seen as a defensive stock also comes because of their ability to make their products available at cheaper prices. If and when the economy begins to slow, more expensive, currently “sexier” products will likely be challenged to retain their sales and profits far more than better established, more affordable alternatives.



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 $12.4 billion.

Earnings and Sales Growth: Over the last twelve months, earnings and revenues have both increased, with earnings growth outpacing revenue growth (18.6% to 14.6%). Growing earnings faster than sales is difficult, and generally isn’t sustainable in the long term, but it is also a mark of management’s ability to maximize its business operations and manage costs. It should be noted that the company’s Net Income is less than 5% of Revenue, which indicates that they operate with a very narrow margin profile.

  • Free Cash Flow: CPB’s free cash flow translates to a Free Cash Flow yield of about  7.5%, which is less than I prefer, but still adequate. CPB’s total Free Cash Flow for the past year was $938 million, a number that has declined since the last quarter of 2016, when Free Cash Flow was a little over $1.15 billion.
  • Debt to Equity: CPB has a debt/equity ratio of 5.73. This number increased dramatically in the last quarter and makes CPB one of the most highly leveraged companies in the industry; the increase came as a result of the company’s acquisition of snack food maker Snyder’s-Lance in March of this year. Even with the increase, their balance sheet indicates operating profits are more than sufficient to service their debt, with adequate liquidity as well.
  • Dividend: CPB pays an annual dividend of $1.40 per year, which at its current price translates to an annual yield of about 3.39%. This is above the industry average as well as the S&P 500 average of 2.0%.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CPB is $4.69 and translates to a Price/Book ratio of 8.78; this is generally above the level I prefer and is significantly above the industry average of 2.3. More importantly, however, the stock’s 5-year average Price/Book ratio is 10.5. A rally to par with its historical average would put the stock above $49. That offers an upside of almost 19% over the stock’s 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 2-year downward trend, from a high around $67 per share to a trend low early last month a little below $33 per share. The stock has rebounded from that point and is currently hovering in a narrow range between support around $40 and resistance in the $42.50 range. The red horizontal lines on the right side of the chart mark the stock’s Fibonacci trend retracement levels, which I expect to act as resistance against a reversal of the current downward trend. The stock would have to break two levels of resistance to reach the $49 target offered by the Price/Book analysis I outlined earlier. That isn’t unattainable, and if the stock can maintain the strong momentum it has shown since the beginning of June, it isn’t unreasonable to suggest that the stock could reach that level before the end of the year. On the downside, a drop below the stock’s current support around $40 would reconfirm the long-term downward trend, with support not expect to be seen until $34 or $35 per share.
  • Near-term Keys: A break to the $43 price range could act as a good signal to enter a bullish position on this stock, either by buying the stock outright or working with call options. If you’re working with a short-term trade, look for an exit in the $45 – $46 range; if you’re willing to work with a longer-term time frame, the $49 level marked by the 50% retracement line is a nice target. If the stock breaks down below $40, you might consider working with a bearish trade, either by shorting the stock or using put options.