- Secular growth in Campbell Soup's products is driving the top line, which in turn fuels our BUY thesis.
- April sales are exceptionally strong - and it's not only about the soup.
- Online presence remains key, nearly entirely offsetting the decline of the offline sales.
We are ready to admit when we were wrong: our Neutral thesis was too conservative and we should have upgraded Campbell Soup (NYSE:CPB) back in 2019. The company is currently approximately 15% from its 52-week high, which is relatively in line with the S&P 500 index. At present, we see clear tailwinds that should allow CPB shares to reclaim the 52-week high of ~$58 in the near term and possibly go beyond.
About the Company:
Campbell Soup (CPB) is a food company, which manufactures and markets food products, with its core segments divided into Americas Simple Meals and Beverages (includes retail and food service channel businesses, such as Campbell's condensed and ready-to-serve soups; Swanson broth and stocks; Prego pasta sauces; and Pace Mexican sauces) and Global Biscuits and Snacks (includes Pepperidge Farm cookies, crackers, bakery and frozen products, and Arnott's biscuits.).
We now see a valuation multiple of 21x as appropriate for 2020 earnings: it consists of 17x for the average industry comps and about 4x for the beverage premium and its margins. When we apply this multiple to our EPS estimate of $2.76 (up from $2.55), we reach a target price of $58 (up from $48). Our rating is Neutral.
Why We Are Now Bullish:
Bottom line leads the way: What’s interesting about the Campbell story is that improvements began 1) before coronavirus started; 2) they were initially bottom line-driven, as some SG&A transformations have taken place around the company. In other words, the setup was already strong for even more tailwinds that unexpectedly took place.
Secular growth in demand for soup products: Both US and international demand expanded with the lockdowns, with China leading the way since January. We estimate incremental demand increase anywhere between 3-6% during the first quarter, beginning in Asia, continuing in February in Europe, and finally hitting the North America region in March. Campbell Soup has been a clear winner as the virus spread across core geographies, with some of its products being among the first ones consumers chose to hoard.
April sales are exceptionally strong - and it's not only about the soup: As of April 19, the latest IRI data indicates that for the four-week period preceding it (capturing late March as well, to be exact) Meals & Beverages segment grew 34%, while Snacks business grew 16% Y/Y. Within Brands, growth was particularly strong with Prego pasta sauce (up 49% Y/Y) and Pepperidge Farms cookies (up 28% Y/Y). Campbell's condensed soup saw an increase of 5.2 MM customers (new households) and Campbell's Chunky soup rose by 4.6 MM customers.
Snacks segment remains a bright spot: Organic sales for this business rose 3% Y/Y recently, with nearly all brands exhibiting positive growth and incremental marketing no longer necessary to boost sales.
Acute need for labor force: The employment situation at Campbell Soup is very different from what we find around the country. In fact, management noted in its April 28 release that it is extending premium payments to some 11K front-line employees. We expect new hiring to take place and be announced over the course of the next several weeks.
V8 softness no longer an issue: Suddenly some issues that were areas of concern in the past no longer appear menacing to the top line. For instance, softness around the V8 product, which troubled us earlier with 30 bps in annual softness and 5-10 bps of margin squeeze, is no longer a problem for the overall CPB model.
Online presence remains key: We note that the online presence for the company remains solid and we do not see the need for further upgrades at this time. Further, we don't see the necessity in extra marketing spend on the SG&A side to boost IT spending. We believe that the company's current success would not be possible without robust online presence and the smoothness of its offline-to-online transition. In fact, CPB is one of the few companies where lost offline sales have been entirely offset by a strong online increase, on the net leading to incremental growth across the board.
Risks to Our Thesis:
- Reputation risks, since any cases of food poisoning or recall could undermine the company’s brand.
- Macro risks, since most Campbell Soup's products are not items of immediate need for consumption, there is always a risk that people cut back when economic times are tough.
- Country-specific regulation: every country is different in terms of food safety practices they have, which often results in extra red tape and incremental costs to the producers.
This article was written by
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