Campbell's Ready To Serve Profits With A Side Of Dividends

| About: Campbell Soup (CPB)

Everyone is betting Campbell Soup (NYSE:CPB) will disappoint when it reports earnings next week. But, investors may find themselves better served using weakness to buy shares instead of sell them.

The company is in the middle of a turnaround geared at resurrecting earnings growth, which is estimated falling 5% this year from last year.

As part of its effort, it's boosted its marketing and research spend, which dragged gross margin down 160 basis points last quarter from a year ago.

There are problems at Campbell.

No one in or outside Campbell is unwilling to admit the company has problems. And management has indicated it's pretty disappointed with its overall performance.

But, like most problems, they tend to get better if they're recognized and worse if ignored.

Campbell's is not ignoring the problem and is instead focused on expanding its natural foods product line and increasing its perimeter presence. Across grocery, natural foods remain a hot spot for growth. Companies like Whole Foods (NASDAQ:WFM) are producing twice the comp store sales upside as some other competitors. And, across all grocery, those outside aisles have been some of the best performing categories.

The largest problem Campbell is facing is in reinvigorating its iconic soup brand. In a fast food world of smart phones, stodgy metal canned soup doesn't have nearly the appeal to younger consumers as artisan ready-to-serve offerings.

As a result, the company's lackluster soup sales have offset a return to growth in beverages, which saw year over year sales growth of 5% last quarter.

This is why Campbell is refreshing packaging - think pouches - and bringing to market a slate of new flavors, such as Coconut-Curry Chicken.

Importantly, Campbell isn't sitting still in beverages, either.

It's V-8 brand is well known and plays nicely into healthier lifestyles. And new products focusing on the sparkling and energy markets could help the segment continue to post growth.

But more importantly, the company's August acquisition of Bolthouse gives Campbell immediate chops in the super premium beverage category, where Bolthouse is the biggest player, with 33% market share and $689 million in trailing twelve month sales through March.

Snacks could help the company return to growth in 2013 too.

Since 2006, Goldfish, which has grown a compounded 10% annually since 2002, have propelled the global baking and snacking segment to 4% compounded annual growth. Snacks have clearly been a bright spot overall, with snack sales up a compounded 6.3% since 2006.

Campbell's is paying attention. It knows emerging markets are expected to see snack growth of 10% annually through 2015. And it's responding with new package sizes and products designed to better grab consumer wallets.

Campbell's Problem is Perception, Not Brands.

In a way, Campbell's problems stem from perception more than brand identity. Everyone knows Campbell's brand portfolio is one of the most widely recognized.

Instead, investors remain convinced its brand strength and innovation won't be enough to break a multi-year track record of range-bound returns.

But bears may find they've become far too complacent in Campbell's potential. With an eye popping 9 days of average volume held short, any traction in sales and earnings may create enough excitement to force covering and break shares out above the upper end of their trading range.

Analysts seem to believe Campbell will get back on track this coming fiscal year. They're currently projecting earnings per share will grow 5% in FY13 to $2.52. This gives Campbell's a forward PE of just shy of 14 - the lower end of its 5 year PE range.

Such short pessimism seems to suggest results have been far worse than reported. After all, such a significant bet would seem more prudent for a company with double digit revenue declines rather than flat top line sales.

Investors willing to bet Campbell's turn around will pay off in 2013 have the additional benefit of being paid to take on the risk. Shares are currently yielding 3.3% and with average annual cash flow over $1 billion since FY08, it's unlikely dividends are at risk.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CPB over 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.