Campbell Soup Tastes Just Right

NEW YORK (TheStreet) -- When even good companies can't escape the market's wrath, investors have begun to look for protection. These days, when cash is not being taken out of the market to put back under the mattress, investors have resort to "playing defense."

To that end, over the past several decades Campbell Soup (CPB) has been one of the best defensive plays in the market. Best known for warming up investors' bellies, Campbell also has a long history of decent returns. And this is regardless of whatever adverse conditions the economy may be facing at the time. Accordingly, the track record has afforded Campbell a much-deserved respect.

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Because of Campbell's "comfort foods," shares are not cheap. They very seldom are. But that doesn't mean decent gains aren't around the corner, given all of the skittishness among other sectors. Plus, when I look at, say, a company like Hormel (HRL), whose stock has surged 50% in the trailing twelve months, I realize that the Street is not as price-sensitive for equities as consumers are during food shopping.

What's more, the recent results from Kellogg (K) and Post (POST), there's no question that the packaged food industry has bottomed. And judging from Campbell's price-to-earnings ratio of 32, which is still 10 points higher than Hormel, there are still hearty expectations here. But can Campbell deliver?

The company will report its fiscal second-quarter results on Friday. The Street will be looking for 73 cents in earnings per share on revenue of $2.27 billion, which would represent a year-over-year revenue decline of close to 3%. But after posting a 2% revenue decline in the November quarter, investors already assume that Campbell will beat this number, especially since it included the recent holidays.

Now, although I have complete faith in the company's management, I didn't come away from the last quarter's conference call feeling the sort of confidence I needed to feel from an already-expensive stock. For instance, Denise Morrison, the company's CEO, which I respect greatly, began the call with an apology, expressing disappointment in the first quarter results. I appreciated the honesty and candor.


In this "show me" environment of corporate leadership, CEOs tend to look for every opportunity to sell their non-accomplishments. Morrison was honest and straight-forward. In that honesty, however, she also lowered the company's fiscal 2014 guidance. And this goes back to the level of respect that I described in the introduction. Despite the bad news, these shares never budged. In fact, they've traded higher.

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With the weak guidance already priced in (to some degree), it's hard to imagine anything cooling off Campbell stock in the next couple of quarters absent a complete global economic meltdown. The Street may end up being right on this one. If management is able to execute on some key objectives, these shares, which are now around $40, should heat up pretty quickly towards the $50 level.

This sounds aggressive, I admit. On a relative basis, I see Campbell (despite posting comparable results to Hormel) has only yielded a third of Hormel's 2013 stock gains. It will all depend on how quickly and effectively management can integrate its recent acquisition of Plum, a fast-growing producer of baby food.

The timeline towards completing has not been exactly clear. Not to mention, there are still several unknowns with this deal. And the same goes for Campbell's other deals, including Bolthouse Farms and Kelsen, which, when combined, gives management more than $1 billion in potential revenue.

The other factor will be to what extent management can deliver organic growth, which declined 4% last quarter. Given the rate at which Campbell has done deals, this has become one of the question marks for what has been an otherwise stellar track record. With earnings expected to grow at a respectable 4.2%, the Street (as it sometimes does) will look the other way, which makes Campbell one of the better defensive stocks on the market today.

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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