Campbell Soup: Kick The Can

Just over a month ago I said that the focus of Campbell Soup (NYSE:CPB) should be on execution. While the company has seen topline sales momentum, this was entirely (and some more) driven by price hikes with volume trends coming down.

Fortunately, leverage was coming down rather quickly and Campbell has become quieter on the corporate front (after some expensive dealmaking in the past). Given prevailing interest rates, appeal was improving, but I failed to see screaming appeal yet amidst the lackluster volume trends.

Creating Background

Pre-pandemic, Campbell went on a divestment spree which included the likes of Arnott's, Kelsen and Bolthouse Farms to become a pure play on snack & meals and beverages (again).

Following these divestments, Campbell was set to become a business with $8 billion in sales, adjusted EBIT of just over $1.2 billion and earnings of $2.50 per share. Net debt of $6.1 billion was still rather high with EBITDA reported around $1.6 billion, for a 3.7 times leverage ratio as shares traded at $42, for a 17 times earnings multiple.

The pandemic provided a boom, as 2020 sales rose to $8.7 billion, with earnings advancing to $2.95 per share, and net debt coming down to $5.4 billion. Amidst more challenging comparables for 2021 sales fell 2% to $2.85 billion, although that the company saw adjusted earnings up three pennies to $2.98 per share. Another year of flattish results were predicted for 2022 (with the year ending in September) as sales ended up increasing by a percent to $8.6 billion with earnings down modestly to $2.85 per share.

The 1% growth for 2022 looked better than it was as pricing of 8%, on the back of inflationary trends, masked a 6% fall in volumes (and mix effects). Fiscal year 2023 sales were seen up 5% to $9.0 billion, with earnings seen at $2.90 per share. With inflationary trends being sticky, the company saw sales up as much as 8% for the year after posting first quarter results, anticipating earnings around $2.95 per share.

Second quarter results, released in March, saw revenues up as much as 12% to $2.5 billion, although that volumes were down 2%, revealing the extent of the price hikes. The company raised the full year sales growth outlook to 9%, with earnings seen between $2.90 and $3.00 per share, as the company managed to reduce net debt further to $4.4 billion. The company furthermore announces a small investment with the sale of the Emerald nuts business to Flagstone Foods, a deal which involved less than a percent of sales.

With shares trading at $50, the resulting 17 times multiple seemed fair in a 5% interest environment, all while leverage was rather quickly coming down. That said, real underlying growth (read volumes) was not seen, as the $50 valuation looked fair, not necessarily offering a great entry point.

Where Do We Stand?

Fast forwarding a month in time, shares of Campbell have lost about ten percent, now trading around the $45 mark. This move can be attributed to the release of the third quarter results with sales growth slowing down dramatically to 5%, with revenues reported at $2.23 billion. The composition of growth is still painful with pricing up 12% as volumes were down a whopping 7%. With pricing cooling off, and volumes falling at the same time, this is not just a matter of price elasticity, as Campbell noted increased competitive actions as well here.

Ironically, it was the $1.1 billion snacks business, which saw pricing of 15%, which saw a mere 3% decrease in volumes. The similar-sized meals & beverage business saw volume down as much has 11%, even as pricing was up "just" 9%. The lower volumes weighed on margins as adjusted earnings were down two pennies to $0.68 per share, with net debt coming in flattish at $4.5 billion.

Despite the softer quarter, and the sale of the Emerald business (which only hurts the fiscal year results for two months), the company maintained the full year guidance. Sales are still seen up between 8.5% and 10% with adjusted earnings seen between $2.95 and $3.00 per share, in fact seen trending towards the upper end of the range.

Amidst the fall in the share price, the resulting earnings multiple has fallen from 17 times to 15 times, although arguably the third quarter results are softer and do not bode well for the 2024 guidance. This comes amidst a somewhat disinflationary environment seen for food companies, which could be painful, although it might help to halt the volume declines as well.

And Now?

The reality is that after the latest earnings report, I am not convinced yet given the deterioration in volumes, creating a potential tough set-up for 2024. Given this I am still not willing to commit, as I am lowering my desired entry target to $40.

The execution simply feels too soft, and given that current non-demanding valuations are not low enough to create a compelling risk-reward, at least in my view, I am cautious. Perhaps some external pressure would be welcomed to create more discipline and improved performance.

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