This blog is devoted to helping investors make informed decisions. It will be regularly updated and provide opinions on earnings results. It is not intended to give investment advice and should not be taken as such. Consult your investment advisor.
Campbell Soup Company $CPB
is one of those stocks that is trying very hard to dispel the idea that
revenue and earnings growth are what drives stock prices. In essence,
the company is not doing very well operationally but it is doing very
well in the ugly sisters’ beauty contest of stably high yielding stocks.
This is what the market wants right now and who am I to argue? That
said I do happen to believe that earnings are really what matters and it
was another mixed quarter for the company.
Earnings Up or Down?
Net earnings rose 29% to 40c in the quarter but adjusted net earnings
fell 5%. Moreover, gross margins slipped again this quarter and the
familiar explanation of higher cost inflation and promotional activity
was cited. So while Campbell has declared that fiscal 2012 was a year of
investment, investors should not conclude that this was purely going
for growth strategy. The company needed to halt declines in certain
areas and revamp product lines.
A look at segmental sales.
Only US Simple Meals and US Beverages recorded year on year sales
increases. Negative currency effects did take growth away from Global
Baking and International Simple Meals but the organic sales growth in
these segments was only 2% and 1% respectively.
The standout performer was US Simple Meals within which soup sales
finally got back to sales growth with a respectable 9% increase.
Condensed soup sales rose 14% while ready-to-serve increased 1%.
However, even this comes with caveats. Firstly the company outlined
that much of this came from movements in retailers’ inventory. Soup has
been strangely volatile category over the last year, so it wouldn’t be
surprising if some retailers had had jump changes in inventory levels.
This just seems like a quarter where Campbell benefited. Secondly,
product revamping, promotions and introducing new flavors in order drive
sales comes at a price.
Here are the segmental movements in earnings for the quarter.
It’s not a pretty picture.
Industry Challenges and Opportunities
Campbell is operating in a tough environment right now. Footfall is
down at traditional groceries and consumers are spending less per trip.
Even worse, customers continue to increase their grocery shopping at
discount retailers. Even a company like private label manufacturer Treehouse $THS is suffering because its traditional customers are seeing their
in-store brands challenged by the rise of sales in the ‘alternate’
channels. In response Treehouse is shifting its company more towards
these channels.
H.J. Heinz $HNZ
recently reported some average looking results but it has the growth
kicker of emerging market growth. Moreover, it is hard to tell how much
of Heinz’s growth is coming from its nutrition segment. A sector that
Campbell doesn’t participate in.
I would put Campbell in a category of stocks like General Mills $GIS and Conagra $CAG.
In other words, they are facing similar problems but they all generate
good cash flow, pay relatively high dividends but have low single digit
growth prospects. I hold some Conagra purely because I like the yield
and it has some value brands that I think can see good prospects in the
age of austerity. General Mills is facing some competitive issues in
breakfast cereal and it is generating little growth elsewhere.
Where Next For Campbell Soup Company?
Frankly I don’t think it is going to get any easier, anytime soon.
The guidance is for 10-12% revenue growth. This sounds great but around
9.5% of that is likely to be due to the Bolthouse acquisition. The
underlying organic growth of 1-2% coupled with declining margins is
hardly anything to get excited about and I think Campbell may have
problems with soup when it cuts back its promotional activity.
That said, investors buy stocks for all different kinds of reasons
and there is no doubt that stable companies with high dividends are
sought after in the current climate. GARP based investors like me may
baulk at buying Campbell but as part of a high yield portfolio the stock
may have a place.
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