CAMPBELL SOUP CO. $57 (New York symbol CPB; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 307.9 million; Market cap: $17.6 billion; Priceto- sales ratio: 2.2; Dividend yield: 2.5%; TSINetwork Rating: Above Average; www.campbellsoupcompany.com) is the world’s largest maker of canned soups. It also makes Prego canned pasta and sauces, Pepperidge Farm cookies and V8 vegetable juices.
Demand for the company’s processed foods continues to decline as consumers switch to healthier foods.
Acquisitions cut reliance on canned foods
In response, in 2013, Campbell completed two acquisitions: it paid $1.55 billion for Bolthouse Farms, a producer of carrots, dressings and fruit juices, and $249 million for organic food maker Plum. In 2015, it also acquired Garden Fresh Gourmet for $232 million. That firm makes refrigerated salsas, as well as hummus, dips and tortilla chips.
As a result of these acquisitions, fresh products now supply 13% of Campbell’s overall sales.
Thanks to these new businesses, Campbell’s revenue improved from $7.7 billion in 2012 to $8.3 billion in 2014 (fiscal years end July 31). However, the higher value of the U.S. dollar hurt the contribution of the company’s overseas operations (19% of its total sales). That caused its revenue to decline to $8.1 billion in 2015, and to $8.0 billion in 2016.
Earnings rose 16.7%, from $783 million in 2012 to $914 million in 2016. Due to fewer shares outstanding, earnings per share gained 20.5%, from $2.44 to $2.94.
A big part of Campbell’s improved profit comes from a multi-year restructuring plan. It is focused on eliminating management positions and merging overlapping functions at various divisions.
Savings target for restructuring raised 20%
Campbell is making better-than-expected progress with this plan. The company now expects those actions to save it $300 million a year, up from its previous target of $250 million. Campbell aims to complete the restructuring by the end of fiscal 2018.
The savings will also help the company with the plan to make its foods healthier by removing artificial colouring and flavours from its soups, cookies and other North American products by 2018. Campbell also plans to use more organic ingredients in its foods.
Due to these initiatives, the company’s spending on new products rose 6.0%, to $124 million (or 1.6% of sales) in fiscal 2016 from $117 million (or 1.4% of sales) in 2015.
Campbell’s strong balance sheet will let it keep investing in its businesses and making acquisitions. As of October 30, 2016, it held cash of $290 million, and its long-term debt of $2.3 billion was a low 13% of its market cap.
Reasonable p/e for a market leader
The company’s earnings should improve to $3.04 a share in fiscal 2017, and the stock trades at a reasonable 18.8 times that forecast.
Campbell also recently raised its dividend by 12.2%. The new annual rate of $1.40 yields 2.5%.
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