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report anything that could make investors rethink the stock? I don't think so, especially given the overall food industry environment, which is nasty. However, Campbell does have some relative wind at its back, especially for the next three quarters.
Also, the company looks better when compared with the likes of
, which seem to sink deeper every quarter.
The condensed soup segment, Campbell's highest-margin business and largest profit contributor, has stabilized, at least for now. Eight-percent sales growth in fiscal 2005 has been followed by 1% in the first quarter of this fiscal year against a tough comp. The installation of gravity-feed shelving
the type of retail display in which products are pulled forward by an angled shelving system is supposedly part of the reason. While I am a bit skeptical that this stabilization can be maintained, the numbers are hard to argue with for now.
The baseline sales growth is higher than the sales growth in promoted volumes, and that is a good sign. Private label has taken large price increases here, as has Campbell (11%). I would expect private label to be gaining share after some indeterminate number of quarters, however. As with all food companies, increased volumes and price hikes do not go together for very long.
The ready-to-serve (RTS) segment had a big volume decline in the last quarter because of price increases and competition from Progresso, which is a division of
. The 17% decline in RTS soup sales came in comparison with a first-quarter 2005 gain of 18% because of a very uneven promotional schedule. Because the company's promotions are spread more evenly over this year, the remaining quarters should benefit from more sustained and hopefully more efficient promotional policies and the comparisons against depressed sales in the three remaining quarters of 2005.
Improving RTS soup sales will be the one thing that might get Campbell's stock price moving to an undeserved premium. RTS volumes have shown better sequential comparisons during the quarter after the large declines induced by big price increases. But Progresso has been gaining market share, even with a price increase in the 8% range, which is in the neighborhood of Campbell's price increases. Progresso's share gain should temper much enthusiasm for the stock on the better quarterly comparisons.
According to both the sell side and me, Campbell's stock is efficiently valued. At $30, the stock discounts a 6% five-year growth rate with a 2% terminal growth rate, which should be about right for a U.S.-focused company in slowly growing categories such as soup and crackers. Sell-side growth targets of $31 (low) to $34 (median) are not too much higher, and discount growth of 7% to 8% is at the high end of Campbell's stated 5% to 7% target, which is based on 3% to 4% sales growth (I like 3%).
Gross margin should continue to rise (+70 basis points in the first quarter) on SAP software installation and the 4.5% weighted price increase in January 2005. Management said on the last quarterly call that pricing and productivity changes offset the cost increase in that quarter. Pricing and productivity will be important going forward to overcome a cost increase of 4% to 5% this year, were just raised 1%.
Campbell will host a conference call at 10 a.m. EST.
At the time of publication, Thomas had no positions in stocks mentioned.
Ron Thomas, CFA, was most recently with Colonial Management Associates (one of the mutual fund subsidiaries of Liberty Corp.) as an analyst covering consumer stocks. Colonial Funds was named by Barron's as its "Mutual Fund Family of the Year" for 2000, based significantly on its consumer staple stocks selection performance. From 1990 to 1999, Thomas was employed at ASB Capital Management in Washington, D.C. as an analyst and later as a co-portfolio manager with absolute discretion over stocks in the financial, consumer staples and consumer services sectors. Prior to that, Thomas was with First City Bancorp. in Houston following financials and consumer companies. He holds a B.A. in economics from Rutgers College and an MBA in finance/marketing from Cornell University.