Some Like it Hot

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Berkshire Hathaway’s recent $28 billion purchase of H.J. Heinz for $72.50 a share, a healthy 20% premium to Heinz's all-time high, thrust a bevy of other food companies into the spotlight, including Campbell Soup Company (NYSE: CPB).

Shares of the Camden, N.J. based company, behind such iconic brands as Campbell’s Soup, Pepperidge Farms and V8 juices, were juiced almost 6% following the Heinz deal. Also giving shares a hearty boost was a research report from Goldman Sachs. The investment powerhouse reaffirmed its “Buy” rating on shares of Campbell with a $40 price target.

“We recommend investors buy CPB ahead of what we believe could be a topline driven 2Q13 beat on the back of better-than-expected soup volumes and strength in its global baking business. Our sales and EPS (earnings per share) for the quarter are 3% and 5% above consensus, respectively. The stock continues to trade at a 20% P/E multiple discount to the overall food group,” Goldman wrote in their fresh report.

Since Denise Morrison took over in 2010 as CEO of the world’s largest soup maker, she has led the company in recognizing consumers' steady shift toward healthy products, fresh food and easy-to-prepare items. The move steered the company to engage in its largest acquisition in its storied 140 year history when it bought Bakersfield, CA based natural food and beverage distributor Bolthouse Farms in July 2012. The acquisition added 10% to Campbell’s bottom line in the latest quarter.

Campbell’s new health conscious culture and always on-the-move consumer focus is also responsible for its new lines of skillet-friendly sauces and soups-to-go packaged in pouches instead of the company’s legendary cans. Both have been well received.

Sales of its Chunky soups rose double digits in its fiscal second quarter thanks to a redesigned label and advertising ties to the National Football League. The company also reported higher-than-expected profit in the quarter.

Campbell’s inspiring quarter was a bright spot in a sector that has been showing lackluster earnings. Kraft Foods (NASDAQ: KRFT) has experienced a slide as it continues to adjust to the recent spinoff from Mondelez International (NASDAQ: MDLZ).

Kraft’s organic revenue—a measure that reflects the company’s comparable sales excluding foreign exchange transactions—slipped 7.2% in the latest quarter, a drop deeper than expected. The slide was attributed to retailers’ working through excess inventory they accumulated prior to Kraft’s October 2012 shedding of Mondelez, which prevented retailers from placing new orders.

Also weighing on Kraft during the quarter was a push by retailers promoting low-priced offerings, an area where Kraft’s products didn’t mesh with the tactic.

Meanwhile Mondelez, the maker of Oreo cookies, Tang, Cadbury and a host of other snacks, missed on both top and bottom lines in the latest quarter. Earnings per shares tumbled to 30 cents a share from 47 cents in the same quarter a year ago. Revenue was trimmed 2% year-over-year to $9.5 billion.

The snack food company has a large global presence and was adversely affected as overseas currencies got clipped and the U.S. dollar gained ground.

On the menu of food companies that look appetizing, Campbell is the cheapest with a P/E of 15.2. In comparison, Kraft's P/E is 17.8, Mondelez's is 16, Hormel Foods trades with of P/E of 18.4 and Hershey's P/E is 22.2.

Campbell has been simmering for some time as a potential takeover target. And as merger and acquisition activity has been hot to date in 2013, Campbell’s shares have reached a near boiling point. Campbell had long been viewed as a good partner for Heinz, but now that Heinz is off the table other suitors bowled over by Campbell's prowess may come knocking.

Campbell is exactly the kind of company guru investor Warren Buffett relishes: American made, good products, strong brands and a solid balance sheet. The Oracle of Omaha says he remains on the prowl for other deals. And with $48 billion left in Berkshire Hathaway's kitty, Buffett has plenty of cash left to wheel and deal. Furthermore, deal making on Wall Street is off to its strongest start in six years, and plenty more transactions are surely cooking.

But Campbell might also do the calling. CFO Craig Owens said the company would be tempted to pounce if a good fit presented itself.

Good soup starts with good stock-- in Campbell's case it works both ways.

DianeAlter has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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