Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Berkshire Hathaway's recent $28 billion H.J Heinz acquisition threw the spotlight on a few food companies, one of them being Campbell Soup (NYSE: CPB). The day the acquisition was announced, its shares rose 6% and are nowtrading at the higher end of the 52-week range, near the high of $42.
History and turnaround strategies:
- Campbell, with its iconic red-and-white packaging and popular soups such as Tomato and Cream of Chicken, was a well-known household brand until it began to lose its market share in the last few years. It market share dipped to 46% vs. 51% in 2007, one of the main reason being its ill-advised move into low-sodium formulations.
- When Denise Morrison took over in 2010 as CEO, she made the right decision to change the focus towards healthy products, fresh food and easy-to-prepare items. She focused on three main strategies : 1) Stabilize and then profitably grow North America soup and simple meals; 2) Expand the company's international presence; and 3) Continue to drive growth in healthy beverages and baked snacks.
- At the recent annual Consumer Analyst Group of New York (CAGNY), the Company announced that it has made significant progress and has been able to stabilize its Soup and Simple Meals business. This was corroborated by its strong 2H13 results as the segment rebounded with sales increasing 2% and EBIT increasing 7%. This was mainly due to increased focus on re-engaging the consumer and innovation and the Company has mentioned that it will continue to focus on innovation introducing more than 50 new products by Aug 2013, up from only 3 in 2010 and 2011.
- With an intention to increase its international expansion, on 14th Feb it announced an arrangement with Grupo Jumex and Conservas La Costeña that will help expand the company’s access to manufacturing and distribution capabilities in Mexico. As a result of these agreements, Campbell will close its plant in Villagrán, Mexico, and recorded a restructuring charge of $6 million in 2Q13.
- Further, in line with its strategy the company also acquired Bolthouse Farms in July 2012, the manufacturer of healthy food products. The acquisition has given it access to $12 billion packaged fresh foods market as well as complements its existing V8 business beverage. For 2H13, Bolthouse contributed $195 million (8%) to total sales and $15 million (2%) to operating income. Company guided that it will contribute ~$750 million to sales and add $0.05 to $0.07 to adjusted EPS in FY13.
- On Feb. 15, Campbell announced its 2Q13 results, sales were up 10% due to 1% organic growth and 9% from its Bolthouse acquisition.
- It reaffirmed its FY13 guidance: Sales growth of 10-12% with adjusted EBIT growth of 4-6% and adjusted EPS growth of 3-5% ($2.51 and $2.57).
- The most important factor for Campbell is its shareholder friendly policy. It has consistently maintained a dividend payout ratio of 46% in the last 4-years (in 2008 it had a dividend payout ratio of 28% due to economic recession). Further, it also an excellent share repurchase program in place. Despite these positives, the Company's share price remains range-bound between $30-$40, ever since the recession and hence I am of the opinion, that it is only a matter of time, before the shares start moving upwards.
- Campbell doesn't have direct competitors but I have tried to compare Campbell to General Mills (NYSE: GIS), and Kraft Foods (NASDAQ: KRFT). Important to note, these competitors have much larger market capitalization as compared to Campbell. General Mills: $30 billion, Kraft: $28 billion, Campbell: $13 billion.
- General Mills, the well-known manufacturer and marketer of branded consumer foods, recently announced lower 3Q12 earnings of $0.54-$0.56 and revised its FY2012 adjusted diluted EPS guidance to $2.53-$2.55. Its previous guidance was $2.59-$2.61. However, at the CAGNY it reaffirmed its previously provided FY2013 guidance of $2.65 and $2.67. While organic growth is expected to be in low single digits it expects to benefit from the recent acquisition of Yoki in Brazil and Yoplait yogurt business in Canada.
- On the other hand, Kraft recently revised its financial outlook for 4Q12 and expects sales to decline by 10.7% y-o-y vs. 9.2% in 4Q11. This is mainly due to greater-than-anticipated trade inventory reductions, offset by strong gains from cost-savings measures.
- Campbell tops the three on the basis of EBITDA margins and Return on Equity. However, on the debt side, Campbell is in line with its competitors when compared on the basis of Debt/EBITDA ratio and Debt/Equity ratio. For details, please refer to adjacent chart.
In my opinion, Campbell is attractively valued at 15 times earnings, backed by strong expected 10% growth, excellent share buybacks, and an increasing dividend (it increased its dividend even during the recession). Furthermore, the company has made significant progress in stabilizing its soup business and its CEO Denise Morrison has no intention of slowing down, announcing the launch of 200 new products worldwide in the next year. However, one should remain cautious with respect to its margins given its dual mandate of growth, which may result in lower margins given heavy dependance on lower-margin categories outside of soup.
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