The U.S. packaged food industry is struggling to grow its sales volumes due to a shift in consumer preferences towards healthy eating alternatives. Companies in the industry need to focus on altering their product portfolios according to changing consumer demands, to address the challenges. Campbell Soup (NYSE:CPB) is also facing sales volume pressures. The company is likely to underperform its peers in the near-term, as it will continue to face challenges to fuel top line growth and as its profit margins will contract. As the business fundamentals for CPB remains weak, I believe, the stock will trade at a discount to its peers. The stock is trading at a forward P/E of 17.5x, versus its industry average forward P/E of 20x. The company needs to reinvest to support its core brands, and also needs to diversify its product portfolio to fuel the long-term revenue growth.
The company reported weak financial results for 4QFY16. The company reported adjusted EPS of $0.46 for the quarter, missing the consensus estimate of $0.50. Also, sales for CPB were down 1% YoY. However, the company's operating margin increased by 30 basis points to 15% for the quarter; cost savings efforts positively affected the operating margin. The company reported disappointing results for its fresh food segment; sales for the segment were down 5% YoY. The company's fresh food segment contributes 13% to the total revenues. Production outage and recall of Protein PLUS drinks, along with weakness in carrots business weighed on the segment's performance. As almost 50% Campbell Fresh segment's sales are from farm channels, which exposes the company to variability in the supply chain. The company is working to address the problems in its fresh food segment, by adding new executives and making the supply chain more efficient. However, in the first half of FY17, the segment's performance will continue to remain weak, which will weigh on the stock price.
Also, the company needs to accelerate its product innovation measures to address the changing consumer demands. It needs to focus on V8 and ready-to-serve soup brands to improve sales. Moreover, it needs to alter ingredients of its core products according to the consumer needs. Also, CPB needs to increase its growth investments to support the struggling brands and should focus more on advertisement and trade promotion.
The company is working to improve its cost structure and targets a cost savings of $300 million by 2018. CPB is unlikely to raise its cost savings target in the near-term. Its profit margins have peaked, and additional cost savings will be tough to generate as it has already significantly decreased headcount and consolidated the business. Furthermore, as the company is altering its product portfolio and expanding its low-margin Campbell Fresh segment, its profit margins will erode. I believe the company needs to focus on improving its sales volume in the present industry environment, by expanding its presence in the healthy food category, strengthening its core brands and expanding in the developing countries.
As business fundamentals remain weak for CPB, it is likely to underperform its peers, which will weigh on its stock valuations. In the present environment, the stock warrants a valuation discount in contrast to its peers due to its weak topline growth, and as its profit margins will contract due to the expansion of its fresh food segment. The company can opt for strategic acquisitions and target to acquire natural and organic food companies in the packaged fresh food category, to strengthen its product portfolio and support sales volume.
The business fundamentals are weak for CPB. The company will face pressures to grow its sales in the present environment. It needs to increase its growth investments to alter its product portfolio according to consumer needs. Also, the company needs to strengthen its core brands by focusing on product innovation and increasing its promotional activities. Moreover, the potential for incremental costs savings remains limited for CPB, and as it is expanding its low-margin fresh food segment, its profit margins will reduce. Moreover, the stock will continue to trade at a discount to its peers until its business fundamentals improve. The stock is trading at a forward P/E of 17.5x, versus its peers average forward P/E of 20x.
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