One of the most iconic companies in the world, particularly when talking about those dedicated to the food space, has got to be Campbell Soup Company (NYSE:CPB). This enterprise, which dates back to 1869, has become a global plier in providing soup and other related products. In recent years, the fundamental performance of the company has been somewhat mixed. Revenue has increased and some profitability metrics have followed suit. But at the same time, others have been rather volatile. Though this is an issue, it's also true that shares of the business are trading at very cheap levels relative to similar high-quality food providers. And on an absolute basis, shares are still like affordable. Because of all of this, I have decided to rate the firm a ‘buy’, indicating that I feel like it should outperform the broader market for the foreseeable future at least.
If you are reading this article, odds are you already know a little bit about Campbell Soup Company. In fact, most Americans know something about this firm. According to management, Campbell Soup Company focuses on providing a variety of food products to its customers. To best understand the company, we should break it up into its individual operating segments. The largest of its segments as of today is referred to as Meals & Beverages. Through this, the company sells products such as Campbell’s condensed and ready-to-serve soups, Swanson broth and stocks, Pacific Foods broth, soups, and nondairy beverages, Prego pasta sauces, Pace Mexican sauces, any variety of other products like juices, canned poultry, and more. Last year, this particular segment made up 53.5% of the company's revenue and 62.6% of its segment operating profits. The other segment is referred to as Snacks. Through it, the company sells products such as Pepperidge Farm cookies, crackers, fresh bakery and frozen products, and other related offerings. It sells Milano cookies, Goldfish crackers, Snyder’s of Hanover pretzels, Kettle Brand potato chips, Emerald nuts, and other similar products. This unit is also responsible for its retail business in Latin America, and its European chips business. Last year, this segment accounted for 46.5% of the company's revenue and for 37.4% of its segment operating profits.
There are other ways to divide the company. For instance, management also provides data based on product category. Although the company is most certainly known best for its hallmark soup brand, soup products as a whole only accounted for 30.3% of the company's revenue last year. The snacks category was meaningfully larger at 47.1% of revenue. Other simple meals made up 13.4% of the company's revenue, while beverages accounted for 9.2%. It is also true that the company is a global player. However, it is still very much US-centric. I say this because, in 2021, the company generated 93.8% of its revenue from its domestic market.
Over the past few years, the management team at Campbell Soup Company has done well to grow the company stop line. Sales increased from $5.84 billion in 2017 to $8.48 billion last year. It is worth noting, of course, that not every year has been a win for the enterprise. Sales in 2020 were actually higher than in 2021, coming in at $8.69 billion. It's worth digging into understanding why sales for the company have historically fluctuated in recent years. A big contributor to the decline in revenue in 2021 compared to 2020 seems to have been the absence of a 53rd week that was there for the 2020 fiscal year. That hit the company to the tune of roughly 2%, accounting for substantially all of the decline the company experienced during that timeframe.
Outside of that, however, the company has undergone a number of changes in recent years. In the final quarter of its 2021 fiscal year, for instance, the business completed the sale of its Plum baby food and snacks business. In 2019, it sold multiple businesses, including its US refrigerated soup business, its Garden Fresh Gourmet business, and its Bolthouse Farms business. Of course, the company has also added other properties to its portfolio during this timeframe. In 2018, as an example, it acquired both Pacific Foods of Oregon and Snyder’s-Lance. Because of the amount of acquisition and divestiture activity the company regularly engages in, investors would be wise to view the firm as an enterprise dedicated to constantly refreshing its brand by recycling out product lines that no longer make sense for it and bringing in those that it feels could be highly complementary or that could help to achieve faster growth.
On the bottom line, things have been much more volatile. Net income has been all over the map in recent years, with no clear trend. The metric has gone from a low point of $211 million to a high point of $1.63 billion. Given this extreme volatility and the absence of a trend, I do think that there are other profitability metrics that deserve more attention when it comes to placing a value on the enterprise. One of these would be EBITDA. Although it has also been volatile, dropping between 2017 and 2019, the overall trend has been positive, with the metric climbing from $1.70 billion in 2017 to $1.89 billion last year. Operating cash flow has been quite volatile. But if you adjust for changes in working capital, it would have risen in four of the past five years, ultimately climbing from $1.29 billion in 2017 to $1.32 billion last year.
When it comes to the current fiscal year, things have been a bit more complicated. Revenue in the first nine months of its 2022 fiscal year totaled $6.58 billion. That's down slightly from the $6.60 billion achieved the same time one year earlier. Net income has also fallen, dropping from $714 million to $661 million. Operating cash flow has risen, climbing from $881 million to $1.10 billion. But if we adjust for changes in working capital, it would have fallen from $1.06 billion to $992 million, while EBITDA has gone from $1.41 billion to $1.26 billion.
When it comes to the 2022 fiscal year as a whole, management expects revenue to be either flat or to increase by 1%. This should be driven largely by organic revenue climbing by between 1% and 2%. However, inflationary pressures are going to push EBITDA down by between 1.5% and 4.5% to, at the midpoint, $1.83 billion, while earnings per share should come in at between $2.75 and $2.85, implying, at the midpoint, net income of roughly $841.6 million. No guidance was given when it came to adjusted operating cash flow. But a rough approximation should give us a reading of around $1.28 billion for the year.
Using these figures, we can see exactly how the company is priced right now. On a forward basis, the firm is trading at a price-to-earnings multiple of 17.1. That's up from the 14.4 reading we get if we rely on 2021 results. The price to adjusted operating cash flow multiple should rise from 10.9 last year to 11.2 this year. And the EV to EBITDA multiple should increase from 10 to 10.3. To put this in perspective, I decided to compare the company to five similar firms. On a price-to-earnings basis, these companies range from a low of 18.4 to a high of 46.9. And when it comes to the EV to EBITDA approach, the range is from 12.4 to 22. In both cases, Campbell Soup Company was the cheapest of the group. Meanwhile, using the price to operating cash flow approach, the range is from 9.4 to 31. In this scenario, only one of the five companies was cheaper than our prospect.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Campbell Soup Company||17.1||11.2||10.3|
|J.M. Smucker Co. (SJM)||22.4||12.4||12.4|
|Lamb Weston Holdings (LW)||46.9||31.0||22.0|
|The Kraft-Heinz Co. (KHC)||38.7||9.4||13.9|
|The Hershey Company (HSY)||27.9||21.1||20.3|
Based on the data provided, Campbell Soup Company appears to me to represent an interesting opportunity for investors at this time. The company is certainly not an all-star from a profitability growth perspective. But the general trend for the firm has, over the years, been fairly solid. Shares are not exactly a steal at current pricing, especially if 2022 estimates hold. But for an iconic brand with a long operating history, they do look affordable. This is especially true when you compare the company to some of its peers. For all of these reasons, I have decided to rate the enterprise a soft ‘buy’ at this time, reflecting my belief that its low price will help it to outperform the broader market for the foreseeable future.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.