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This Undervalued Food Company Has an Upside in 2013

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In addition to their famous soups, Campbell Soup Company (NYSE: CPB) also offers a variety of household-name grocery brands.  Despite an ever-increasing dividend and an excellent share repurchase program, the stock has traded pretty flat over the last decade, mainly hovering in the $30-40 range. 

Why isn’t the share price rising?  The number of outstanding shares has decreased by more than 12% since 2009, the economy is much better, and the dividend has been increased by 16% since then.  Yet, the stock hasn’t seen any significant price appreciation.  With the stock trading at the low end of its historic P/E range, I believe it is just a matter of time before we see a big move to the upside for Campbell Soup.

Profile and Growth Efforts

Campbell Soup sells their trademark soups, as well as sauces (Prego, Pace), beverages (V8), and snack foods (Pepperidge Farm, Arnott’s Biscuits).  Approximately 69% of Campbell’s business comes from the U.S., with the company’s largest customer by far being Wal-Mart (NYSE: WMT), which accounts for 17% of Campbell Soup's total sales.

So, it may be a good idea for Campbell Soup investors to monitor Wal-Mart and the trends in sales that they report.  If almost one-fifth of the company’s business is tied to Wal-Mart, it is pretty safe to say if Wal-Mart starts doing poorly, Campbell Soup will suffer also.  On the other hand, if Wal-Mart’s sales skyrocket, Campbell Soup will benefit.  Wal-Mart may actually be a good way to play food producers as a whole, without having to pick individual names.  The company is very attractively valued at 14 times earnings with 10% forward growth, not to mention their excellent buyback and dividend that has increased every year, even during the 2008-09 recession.

Campbell’s has been active in acquisitions and partnerships, which seems to be the company’s primary growth strategy.  Most recently, they acquired Bolthouse Farms, best known for their premium fruit beverages.  Additionally, Campbell Soup recently announced a plan to improve its asset utilization and supply chain cost structure, which should benefit shareholders beyond 2013, when the company expects $115 million in one-time charges related to these changes.

As mentioned before, Campbell Soup has been very actively buying back shares, having spent $412 million doing so in 2012.  Going forward, the company has said that it will make debt reduction more of a priority.  I believe they will indeed continue to repurchase shares, but possibly at a slower rate until a dent is made in the company’s approximately $2 billion in debt. 

Valuation and Comparisons

As I mentioned already, Campbell Soup trades at the very low end of its historical valuation (see below).  Currently trading for right around 15 times earnings, I believe Campbell Soup should trade at a little higher of a valuation due to its growth potential and shareholder-friendly nature.  Campbell Soup is projected to earn $2.54 per share this year, and $2.69 and $2.85 in 2014 and 2015, respectively, for 6% annual growth.  I believe these estimates are very conservative, as I think the Bolthouse Farms acquisition will have more of a positive impact than analysts believe.  Bolthouse’s products are generally health-food oriented, and that is where the American diet is trending towards.

<img src="/media/images/user_14267/cpe-valuation_large.png" />

For comparison’s sake, I’d like to look at another diversified food company, General Mills (NYSE: GIS) which trades at a slightly higher P/E of 15.6, however with a slightly higher 7.2% forward growth rate.  The well-known maker of breakfast cereals also produces a diverse line of ready-to-eat food products.  General Mills also holds slightly more debt than Campbell Soup at $7 billion (25.4% of the market cap) as opposed to $2.8 billion for Campbell Soup (23.7%).  These two companies are very similar when you compare the numbers, but Campbell’s just comes out a little bit ahead. 


Using the data in the chart above, I calculated a 10-year historical average P/E of 16.35 times earnings, indicating that Campbell Soup is trading at a slight discount with no change in the fundamentals over the past few years.  Using the earnings projections mentioned above, I believe this stock should be at $41.53 in a year and $43.98, based on the company’s historical valuation.  As long as all goes well when the company reports, these targets should be easily attainable in this improving economic climate.

KWMatt82 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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