This post is the second in an ongoing series providing a detailed analysis on each of the 33 stocks highlighted in my articles QE-Proof Stocks for Summer 2011 and More QE-Proof Stocks for Summer 2011. The first post in this series was McDonald's: A Solid Long-Term - and Post QE2 - Investment.
Campbell Soup (CPB) is the second company in my series examining stocks that bucked the overall market trend and continued to rise after the end of QE1 last summer. But unlike McDonald’s from my first post, Campbell Soup may face some headwinds in repeating its outperformance in the aftermath of QE2.
Campbell’s operating performance has been generally lackluster. Revenue growth has been virtually flat over the last five years, and the company recently lowered its sales outlook going forward. While Campbell Soup has generated some decent mid single digit earnings growth over the last decade, both gross and operating margins have remained essentially flat and net profit margins have risen only incrementally during this same period. Looking ahead, rapidly rising food input costs coupled with declining sales growth and increased promotional pricing activity all point toward a continuation of recent margin compression trends, which would serve as a headwind for the stock price.
From a valuation perspective, Campbell Soup stock does appear attractively valued at 14.0x earnings versus its historical average of 17.1x earnings. However, it is reasonable to consider whether this discounted valuation actually makes sense at present given the mounting cost and margin pressures the company is facing going forward.
It should be noted that despite these operational challenges, Campbell Soup also has its merits. First, it is a financially solid company that is a consistently strong free cash flow generator. It is also the dominant global player in the soup category, which is a more recession proof segment in the packaged food space, as budget crunched consumers may even increase their demand for soups during economic downturns in an effort to save money. Finally, the company has steadily increased its dividend over the last decade, including a +10% annualized increase over the past five years and a near doubling of the payout from 2004 to today.
Campbell Soup’s track record of generating shareholder wealth is mostly unexciting, however. Although Campbell’s return on equity is very high, this is largely a result of high financial leverage. As for the stock price, you could have purchased shares of Campbell Soup for a dividend adjusted $34.35 back on October 14, 1997. As of March 31, 2011, you could purchase these same shares for $33.11. And along the way during this near 14-year time period, the stock price peaked at a dividend adjusted $42.08 way back in October 1998, has not been over $37 since 2008.
Campbell Soup stock does not set up well from a technical perspective either. After performing consistently well from the market bottom in March 2009 through August 2010, the stock price has essentially rolled over in the months since. The stock failed to reach a new high in November 2010 and subsequently broke decisively below its 20-day, 50-day and 200-day moving averages. In the four months since, Campbell Soup stock has been setting a series of lower highs and lower lows and has seen resistance first at the 200-day moving average and subsequently at both the 50-day and 20-day moving averages. While the stock does have some support at the $33 per share level, it is relatively weak and the next support level would come in the $31 to $31.50 range. On the flip side, a sustained breakout above the $34.50 to $35.50 range would be a positive signal in reversing the current negative price trend.
Despite this lackluster stock performance and challenging outlook, Campbell Soup’s recent resiliency and defensive chops during chaotic markets remain noteworthy. During the peak of the financial crisis from September 2008 to November 2008, Campbell Soup was one of the rare stocks that actually held essentially flat when the rest of the market was losing over -50% of its value. And even when the broader market decline finally caught up to Campbell Soup stock by the end of 2008 and into early 2009, the overall peak to trough decline was still a fraction of the decline experienced by the overall market. And its performance following the end of QE1 last summer is noted by its inclusion in this series.
Bottom Line: Campbell Soup is a largely unexciting investment opportunity at this time for a post QE2 market. The company faces operational headwinds and the technical outlook is currently weak. Campbell Soup is a financially solid company with a steadily increasing dividend, however, and its recent track record as a defensive stalwart during times of extreme market turmoil are notable. Thus, a reversal in technical trends may create some appeal in the coming months for a possible short-term position in the stock. Otherwise, better stock investment opportunities likely reside elsewhere.
Previous posts in the series:
(This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.)