Is Now the Time to Buy Campbell Soup?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Earlier this week, it was announced that Campbell Soup Co. (NYSE: CPB) purchased Bolthouse Farms for $1.55 billion. Now, this acquisition came as a slight surprise, purely because of its total size; it was the largest of any kind in Campbell’s history. Despite the fact that Bolthouse already made concentrate mix for Campbell, company execs felt that it was necessary to purchase the high-end juice maker, adding to its already enormous collection of brands ranging from Prego to V8. It remains to be seen how the markets will view this move in the long run, but shares of CPB have been particularly bland of late. Since the start of 2012, the stock has lost 1.5 percent while the packaged food industry and the broader market indices have been in the green.
It appears that much of Campbell’s woes can be attributed to higher commodity costs, and increased spending on marketing – both of which had a factor in the company’s substandard Q3 earnings release earlier this summer. Specifically, year-over-year EPS fell by 2 cents to $0.55, despite the fact that net sales actually saw a slight increase. Since the recession, the company’s financial prospects have been solid yet unspectacular. Three-year average EPS growth (11.2%) has been in the double digits and higher than competitors like Unilever PLC (NYSE: UL) at -5.5%, and General Mills (NYSE: GIS) at 7.3%, but below the broader industry average (14.1%) and the likes of Kraft Foods (NASDAQ: KRFT) at 18.0% and Nestle SA (NASDAQOTH: NSRGY) at 54.2%. For a more detailed look at Kraft Foods and how its upcoming spin-off might affect your portfolio, this article is worth reading. Back to the point, these numbers may seem like financial gobbledygook, but they do illustrate the point that investors can find stronger earnings growth in other areas of this industry.
One other point of concern can be seen when looking at Campbell’s debt financing. With a debt-to-equity ratio (1.6) far above the industry norm (0.6) and competitors like UL (0.5), GIS (0.9), KFT (0.6), and NSRGY (0.1), the company’s earnings may see increased volatility as interest expenses pile on. With its recent acquisition, CPB will actually increase its debt by nearly 20 percent, as Bolthouse Farms had an estimated $675 million in obligations outstanding. This is not likely to be something that the markets take lightly.
Interestingly, Campbell looks like it has some characteristics of a value-trap. Specifically, the stock trades at a P/E ratio of 14.0X, which is below the industry average (20.4X), CPB’s own 5-year historical average (15.5X), UL (18.7X), GIS (16.4X), and KFT (19.6X). Over the past half-decade, Campbell’s earnings have historically traded at a 3 percent premium to those of the S&P 500 Index. This year, shares appear cheaper, trading at a 1 percent discount.
By the end of 2012, analysts are expecting Campbell to report EPS of $2.41, which would actually be a 13-cent decline from the previous year. Even though slight growth is estimated in 2013 (2.9%), EPS is still not expected to reach 2011-era levels; this may be the biggest reason to stay away from the stock. Assuming that earnings are a major driver of stock prices, it is obviously not good news if Campbell’s bottom line remains stagnant over the next two years. As expected, WealthLift’s Sentiment Index rates CPB as a strong sell, with around 75 percent of the community’s users placing an “underperform” rating on the stock.
To recap, now looks like it is not the time to buy shares of Campbell Soup. Whether it is the company’s recent cost constraints, high levels of debt, or stagnant earnings forecast, investors must be wary of CPB’s low valuation. After all, there looks to be a fundamental reason why shares are depressed. Stay away from this value-trap.
For more trading ideas in an uncertain market environment, visit WealthLift INSIDER today.
Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Unilever. 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.If you have questions about this post or the Fool’s blog network, click here for information.
