Campbell Soup - Premium Valuation Is Not Warranted

| About: Campbell Soup (CPB)

Summary

Campbell Soup does not sell more soup after a harsh winter and new product introductions.

Sales and earnings for the coming quarter will be soft again.

Premium valuation is not warranted given poor growth and leverage.

Investors in Campbell Soup (NYSE:CPB) were not pleased with the company's third quarter earnings report, although the company managed to contain losses during Monday's trading session.

I do not find shares attractive at current levels amidst a premium valuation, a fair bit of leverage and lack of growth.

Third Quarter Headlines

Campbell Soup reported third quarter revenues of $1.97 billion, up 0.4% compared to last year.

The company reported earnings of $184 million attributable to its shareholders, which is three million more compared to last year. Earnings per diluted share inched up by a penny to $0.58 per share.

Looking Into The Operations

Campbell's top line growth was limited as organic sales increased by just a percent. A whole range of issues affected top line results, which fell short of consensus estimates.

Volumes and mix were up by 2%. Acquisitions and prices each added two percent to revenues as well. This was offset by a 3% negative impact from increased promotional spending and a 2% drag from adverse currency movements.

The U.S. simple meals business reported a 7% jump to $672 million. Bolthouse reported a 4% increase in revenues as well, offset by weakness in the U.S. beverage business, which reported a similar percentage decline in revenues. International simple meals and beverage revenues were down by 17% to $186 million, which is really a poor performance.

Gross margins fell by 170 basis points to 34.3% of sales due to a promotional spending increase and cost inflation. Campbell was aggressive in cutting its operating costs to save operating margins. The company cut marketing and selling costs by 11.4% to $217 million while administrative costs fell by 18.3% to $134 million.

Outlook Has Been Cut

On the back of the soft quarter, Campbell has cut its full-year sales target from continuing operations to 3%, down from a previous guidance of 4%-5% growth. The cut in the guidance is severe, given that the company already has published its results for the first three quarters of the year.

Adjusted earnings per share are now seen at the low end of the $2.53-$2.58 per share guidance.

Valuation

Campbell Soup ended the quarter with $222 million in cash and equivalents. Total debt of $3.9 billion results in a rather sizable net debt position of $3.7 billion.

Revenues for the first three quarters of the year came in at $6.42 billion, while reported earnings came in at $681 million.

At $44 per share, Campbell Soup is valued at $13.8 billion. Given that earnings are seen at the lower end of the adjusted earnings guidance, the company trades at 17-18 times adjusted annual earnings.

The quarterly dividend of $0.312 provides investors with a 2.8% dividend yield.

Takeaway For Investors

The lack of growth shown by Campbell Soup is disappointing as the company is repositioning itself to benefit from growth trends. The company aims to restore the core, being defined as its domestic soup and simple meals business. This should be accompanied by international growth, growth in snacks and a growth of the healthy beverage business.

The company introduced many new flavors of soup in January, and many anticipated that this introduction round and the harsh winter would boost soup sales, but in fact, sales were flat, which is disappointing. According to CEO Morrison, increased soup promotions did not result in the desired sales boost.

The $8 billion conglomerate now has 11 brands with over $100 million in sales following the $1.5 billion acquisition of Bolthouse Farms in 2012.

All in all, I don't believe that shares offer great appeal at the moment. The company trades at premium GAAP earnings multiples, the company employs quite a bit of leverage and Campbell is not showing real growth. The 2.8% dividend yield is compelling, yet I believe shares are riskier than many currently believe.

I remain on the sidelines.

Disclosure: I 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.