Mmm Mmm Good! Soup maybe; stock not so much

Sometimes when the outlook for growth at a company stalls, it can present an opportunity to scoop up valuable shares at bargain prices. On the other hand, it may be a signal to stay clear of that stock.

Credit Suisse Analyst Robert Moskow sees Campbell Soup Co. (NYSE–CPB) fitting into the latter category. With a 12-month target price of $41—well below the current price—he maintains his “underperform” recommendation.

For some time now, the analyst has had a bearish outlook for the first half of Campbell Soup’s fiscal year 2015: the six months ending Jan. 31, 2015. (Campbell uses a fiscal year-end of July 31.)

Now, Mr. Moskow says, he’s getting agreement on that stance from both Campbell Soup’s executives and the analysts who cover the stock.

For the full fiscal year ending July 31, 2015, Mr. Moskow reports, management is now projecting EPS “growth” of only zero per cent to two per cent. At the same time, he says, “the stock lacks high conviction backing by the Street.”

Even so, the analyst points out, stagnant pricing and negative trends in the company’s product mix mean he can’t view Campbell Soup as a contrarian play.

That stagnation shows up in sales statistics for the company’s core market, U.S. retail. Mr. Moskow reports that total U.S. retail consumption over a recent 12-week period rose just one per cent, held back by a two per cent dip in canned soup and a 3.5 per cent decline in V8 juice.

Helping to offset this, he says, were increases in two lower-margin areas: Bolthouse Farms (up more than 20 per cent) and Pepperidge Farm (up three per cent). He notes, too, that higher sales of these products were driven by increased promotional spending.

Mr. Moskow also cautions investors to view his second quarter estimates in context. Yes, he is projecting that sales will rise four per cent compared to a year earlier and earnings before interest and taxes will grow six per cent.

However, he reminds investors that this year’s numbers look good mainly due to a shift in Campbell’s trade inventory in the year-earlier period.

More telling, perhaps, the analyst is forecasting revenue growth of just 1.5 per cent for the first half of fiscal 2015 compared to a year earlier, along with flat earnings before interest and taxes.

Meanwhile, the stock is trading with a P/E of 17.5 on forecast earnings for the next 12 months. This, Mr. Moskow says, is in line with Campbell’s package food peers—despite its less-than-stellar outlook.

 

Investor’s Digest of Canada, MPL Communications Inc.
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