Campbell Soup Company is the reason core stocks will outperform
Value and performance are the reasons Campbell Soup Company will outperform
The Q3 report of Campbell’s Soup Company (New York Stock Exchange: CPB) is a good reason why consumer staples stocks will outperform over the next 12-24 months. The main conclusion of the report is that inflation continues to rise, but society has been able to mitigate its impact. This means for investors that the earnings outlook will hold or even improve in the face of a decline among the average S&P 500 companies. In the case of Campbell Soup Company, the low 17X earnings it trades and the high dividend of 3.15% he pays will help him outperform others in the consumer staples sector. High flyers like Hormel, Clorox and McCormick are trading at much higher valuations of 24X, 25X and 28X while paying much lower dividends.
“Our improved supply chain execution along with inflation-driven pricing has begun to ease the margin pressure we have experienced over the past 12 months. Although the operating environment remains challenging and we keep expecting significant inflation (emphasis added), our team is working well, and Campbell is on a much stronger footing today,” said company CEO Mark Clouse.
Campbell Soup Company has a tasty neighborhood
Campbell Soup Company results show that the company outperformed at all levels. The company had net revenue of $2.31 billion, a 7.6% gain over last year, despite divestitures made during the period. Revenue beat consensus by $0.090 billion or 400 basis points on strength across all segments. On an organic basis, sales from continuing operations increased 9% as prices offset lower volumes. Volume fell 3% from last year’s pandemic-spurred competition, while prices rose 11%. On a consumption basis, including inventory levels, sales are up 4% for the year and 14% from pre-pandemic competition.
The company reported margin compression despite efforts to mitigate it, but far less than expected. The 50 basis point decline in GAAP margin is offset by a 90 basis point improvement in adjusted margin which led to a solid improvement in net income. On the earnings side, Adjusted EBIT is up 23% YoY, GAAP EPS is up 32% and Adjusted EPS is up 37% and beat the Marketbeat.com consensus by one penny. Not bad considering the conditions, but the real upside is that this consumer staples company not only benefits from a shift to lower-cost items, but also from pricing power.
The guidance is a bit mixed but ultimately bullish for the stock. The company is raising its revenue outlook by 200 basis points at both ends of the range, but keeping the EPS guidance stable. The company says inflation will be higher than expected in the 2nd half and will continue to put pressure on margins for the foreseeable future.
The Technical Outlook: Campbell’s Bottoms On Firming Sentiment
At least 3 of 10 analysts covering Campbell Soup Company announced target price increases following the earnings release. The caveat is that their consensus of $49 is only 9% above the Marketbeat.com consensus which itself is lower than the current price action. While Campbell’s has thoroughly, it looks like the rebound will leave the stock range-bound in the near term at least. Longer term, assuming the company can continue to execute on its inflation mitigation efforts, we see CPB progressing to a new high by the end of the year.