Campbell Soup Still Too Hot

NEW YORK (TheStreet) -- Invest long enough and you will come to find that certain companies just never come cheap, regardless of whatever economic conditions those companies face. To that end, Campbell Soup Co. (CPB)  fits this criteria for demonstrating that the Street is not as price-sensitive as those who typically shop for its products.

Although Campbell's stock, which has posted year-to-date gains of "only" 17%, lags behind Hormel's ( HRL) 48% surge, Campbell's price-to-earnings ratio of 33 is nine points higher than Hormel's. And it's four points higher than the industry average. Clearly, the Street still has hearty expectations for Campbell, even though the stock has shed roughly 15% in the past six months.

Even so, as with Hormel, which I also consider expensive, I don't believe it makes sense to bid up Campbell's shares while hoping that the Street has pegged this story correctly. But my issue is not just with Campbell's valuation.

Given the better-than-expected results I've seen from Kraft ( KRFT), Mondelez ( MDLZ) and General Mills ( GIS), there is a clear recovery in the packaged food industry, which, until recently, had soured investors' portfolios. Unlike several peers, Campbell, whose first-quarter revenue declined 2% year-over-year, has brought nothing to this food fight. Not even a covered dish.

If you've been following this sector as long as I have, you'll realize that there is nothing analysts enjoy scrutinizing more than "organic growth," or the metric that measures a company's operational performance using only internal resources and excluding events like acquisitions.

As with, say, ConAgra Foods ( CAG), which has grown primarily through acquisitions, organic growth is something that Campbell has struggled to produce. And it seems things are getting worse.

After posting 1% organic growth in its fiscal fourth quarter ended in August, organic revenue declined 4% last quarter, a gross underperformance against Hormel and Kraft, two companies that trade at much lower multiples.

I appreciate that there were factors outside of management's control that contributed to the dismal results. These include retail inventory movements resulting from the Thanksgiving holiday arriving later than usual, due to the whims of the calendar. That was also the case for Kraft. And when ConAgra reports earnings in a few weeks, we should get a better sense of how real of an adversity the timing of Thanksgiving was.

At this point, I look at these results objectively and wonder what, exactly, the Street sees that I'm not seeing. And with adjusted earnings from continuing operations declining by 21% year-over-year, what I see is a business with meaningful operational flaws that it must work to repair.

To be completely fair, as bad as this quarter was, Campbell's management didn't try to paint it as anything else. I respect that. Denise Morrison, the company's CEO, began the conference call with somewhat of an apology saying: "I'm disappointed with our first-quarter results." You can't get any more honest than that.

Management also lowered fiscal 2014 guidance. While I was not entirely surprised -- it made the right choice -- it amazed me that the stock didn't fall to a more reasonable multiple on the news. I think that speaks to the respect Campbell still commands with investors.

The way I see it, the guidance reduction shows a lack of confidence that management has in the business or in its ability to execute on some key objectives or both. That said, I believe that with the recent acquisition of Plum, a fast-growing producer of baby food, management deserves more time to turn things around.

Don't mistake that as an endorsement to buy the stock. Truth be told, there are still unknowns with the Plum acquisition. The same can be said of Campbell's deals for Bolthouse Farms and Kelsen, which, when combined, present Campbell with potential revenue of more than $1 billion.

If management can harvest strong profitability out of these deals, I can see how these shares make sense at a P/E of 33. Until revenue and operating earnings take a turn for the better, I'm going to remain on the sidelines here, even if I have to chase Campbell higher.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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