Are Short Sellers Right About Campbell Soup?

| About: Campbell Soup (CPB)
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Campbell Soup (NYSE:CPB) is expected to release its Q4 2012 earnings today. While the company has a history of beating analyst estimates, we are not confident about CPB's long-term prospects. The company's earnings growth rate was 10% in the last five years, but is expected to be less than half (4%) that figure for the next five years. The company is dealing with a decline in sales for its core soup business, as well as other segments. It is looking forward to introducing new products and (soup) flavors this year. We advise investors to stay away from CPB, until the company is able to wean its soup business off promotions, and new products can bring a turnaround in sales. We are not recommending a short position as the stock already has a very high short ratio.

Business Overview

Campbell Soup operates in the processed and packaged food industry, as it is the manufacturer and marketer of foods and meals that include soup, beverages and snacks, under the brand names of Campbell's, V8 and Pepperidge Farm. The company operates through the following segments: U.S. Simple Meals (soup and sauces), Global Baking and Snacking, International Simple Meals and Beverages, U.S. Beverages, and North America Foodservice. The main contributors to CPB's revenues are the U.S. Simple Meals (31%) and Global Baking (~30%) segments, according to the last quarter results. Revenues from U.S. soups and sauces have been falling (declining volume partially offset by higher selling price), so the company has to incur significant marketing expenditures. EBIT from all segments showed a decline (YoY) in the last quarterly results as well.

A reduction in the sales volumes of all segments, except U.S. Beverages, is being partially offset by prices. This is not sustainable over the long term because the company cannot be competitive if it raises prices to offset the volume decline. The company is in the process of restructuring as well.

Analyst Estimates and Surprise History

The consensus estimate for EPS is $0.38 on the back of revenues of $1.6 billion. These revenues are 0.4% less than Q4 2011 revenues of approximately $1.61 billion. The EPS estimate of $0.38 is less than the $0.43 reported in 2011.

For the full fiscal year 2012, analysts expect EPS of $2.4, down from last year's $2.54. The company guided to an adjusted EPS (excluding the Bolthouse acquisition) decline at the upper end of 5% to 7% ($2.36-$2.41/share).

The Street expects revenues for the full fiscal year 2012 to decline by 0.2% to $7.71 billion, while the company has guided to the lower end of a 0%-2% sales growth range.

The company has a history of beating analyst estimates.


Financial Position

CPB has a beta of 0.29 because it operates in the consumer staples sector, and is relatively unaffected by the economic situation.

The company's margins have dropped slightly lower than their last five-year averages.

The total debt-to-equity ratio is 216%, as compared to H. J. Heinz Company's (HNZ) 189%, General Mills, Inc.'s (NYSE:GIS) 96% and Kraft Foods Inc.'s (KFT) 85%. Short-term debt and the current portion of long term debt was $751 million last quarter. The operating cash flow (trailing twelve months) is $1.12 billion.

The stock's dividend yield is 3.3%, with a payout ratio of 50%. The free cash flow yield is 3.9%. The dividend is sustainable at the present cash flow levels, but growth may not occur in the near future owing to debt payments. The dividend yield of peers like KFT, GIS and HNZ is 2.8%, 3.4% and 3.7%, respectively. All these peers have higher payout ratios. The company also repurchases shares, with $819 million remaining under the repurchase program. The company has cash of $390 million.


CPB's forward P/E is 14x, as compared to KFT's 15x, GIS' 13.6x and HNZ's 14.7x. With regards to EV/EBITDA, the company is trading at the same multiple (9x) as the packaged food group average calculated by JPMorgan (NYSE:JPM).

CPB's PEG ratio is 3.55 as compared to 1.55 for KFT and 2 for GIS and HNZ each, showing that it is overvalued as compared to its growth opportunities.

At a forward P/E of 14x and an earnings estimate of $2.62/share, the price comes out to be $37. The average target price by analysts polled by Yahoo is $33.93.

*2014 EPS calculated by applying a 4% long-term growth rate.

The stock has a short ratio of 9.5 days; hence, we advise against a short position. We believe that there is no upside for CPB in the foreseeable future. New products, when launched, will be accompanied by promotion and production costs, and do not have a turnaround potential given the general consumer shift away from soup. The stock is fairly priced after it appreciated by 12% (due to upgrades) over the last 3 months to reach its 52-week high. The stock can be of some interest to income investors. For others, we suggest staying away at present, and looking for a better entry point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Consumer Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.