Campbell Soup Makes a Cold Dish for Growth-Hungry Investors

NEW YORK (TheStreet) -– With shares down more than 6% over the past two months, investors are hungry for any news that will heat up Campbell Soup (CPB) stock. They didn't get it last week and probably won't for some time.

There are better -- and cheaper -- food-related companies worth your investment, starting with General Mills (GIS) .

Campbell's, known for its cans of soups, Pepperidge Farm snacks, V8 products and Spaghettios missed revenue estimates, which sent the shares lower by another 2.5% the day after the earnings report.

With the stock at $43.50, Campbell shares are up close to 3% for the past 52 weeks but less than 1% on the year to date, trailing the 7.75% gain in the S&P 500, according to CNN Money. Campbell shares can get even colder unless management figures out a way to get the company out of the flat revenue range where it has been for the past decade.

These shares are not cheap. The stock is trading at a trailing price-to-earnings ratio of more than 26. This is one point higher than the industry average P/E of 25, according to Yahoo! Finance.

Shareholders can do well if management can grow the company's core business and deliver on new products. Margins seem to be under pressure. The 2015 guidance suggests revenue growth of just 2% on the high range.

Investors, consider parking your money elsewhere.

There's General Mills or Mondelez (MDLZ) , which trade at multiples that are seven points and nine points cheaper than Campbell, respectively. Plus both General Mills and Mondelez operate at higher gross margins than Campbell.

That Campbell stock enjoys a higher premium than it deserves shows Wall Street is not as picky on price as consumers are shopping for food. When you consider General Mills outperforms Campbell by one point in operating margin and pays a higher yield (3.20% vs. 3.0%), where's the value?

Despite missing revenue estimates by $1.87 billion, expectations remain high for Campbell, which reported 7% year-over-year revenue growth thanks to the benefit of one additional week in the fiscal calendar.

On an organic growth basis, the 7% jump in revenue was less impressive. Given the rate at which Campbell has done deals, investors should assess the company's real underlying performance by extracting out the revenue contributions from acquisitions. It's the only way to truly understand how efficiently Campbell is operating. Those acquisitions in the most recent quarter include Plum, a maker of baby food, as well as Bolthouse Farms and Kelsen, which, when combined, will give Campbell more than $1 billion in potential revenue. These three acquisitions gave Campbell a 3% revenue boost.

But taking out these contributions, Campbell's organic growth in the last quarter came in at a negative 2%. In fairness, currency fluctuations also negatively affected the results. But Campbell's valuation still does not support the company's performance.

The company shaved off another 210 basis points in gross margins but gross margins are still an overhang. The company has resorted to share buybacks to prop up its stock. Denise Morrison, Campbell's CEO, wasn't pleased with the performance. It didn't help that fiscal-year guidance for both revenue and earnings were below the company's long-term targets.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @Richard_WSPB

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


TheStreet Ratings team rates CAMPBELL SOUP CO as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate CAMPBELL SOUP CO (CPB) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, compelling growth in net income, increase in stock price during the past year and notable return on equity. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

You can view the full analysis from the report here: CPB Ratings Report

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