Value And Yield Is Why Campbell Soup Company Will Outperform

The Q3 report from Campbell Soup Company (NYSE: CPB) is a good reason why the Consumer Staples Stocks will outperform over the next 12 to 24 months. The key takeaway from the report is that inflation is still rising but the company has been able to mitigate the impact. What this means for investors is the outlook for earnings is going to hold steady or even improve in the face of a decline among average S&P 500 companies. In the case of Campbell Soup Company, the low 17X earnings that it trades for and the high 3.15% dividend that it pays will help it outperform others in the Consumer Staples sector. High-fliers like Hormel, Clorox, and McCormick trade at much higher valuations of 24X, 25X, and 28X while paying much lower dividends.

“Our improved supply chain execution along with inflation-driven pricing began to mitigate the margin pressure we have experienced over the last 12 months. While the operating environment remains challenging and we continue to expect significant inflation (our emphasis), our team is executing well, and Campbell is on a much stronger foundation today,” says company CEO Mark Clouse.

Campbell Soup Company Has Tasty Quarter

The Campbell Soup Company results show the company outperformed on all levels. The company brought in $2.31 billion in net revenue for a gain of 7.6% over last year despite divestitures made during the period. The revenue beat the consensus by $0.090 billion or 400 basis points on strength in all segments. On an organic basis, sales from continuing operations increased by 9% with pricing offsetting a decline in volume. Volume fell by 3% versus last year’s pandemically boosted comp while pricing increased by 11%. On a consumption basis, including inventory levels, sales are up 4% for the year and 14% versus the pre-pandemic comp.

The company reported margin compression despite the efforts to mitigate it but far less than anticipated. The 50 basis point decline in GAAP margin is offset by a 90 basis point improvement in the adjusted margin that drove solid improvement on the bottom line. As for earnings, the adjusted EBIT is up 23% YOY, the GAAP EPS up 32%, and the adjusted EPS is up 37% and beat the Marketbeat.com consensus by a dime. Not bad given the conditions but the real takeaway is this consumer staples company is benefitting not only from a shift to lower-cost items but from pricing power as well.

The guidance is a little mixed but ultimately bullish for the stock. The company increases its outlook for revenue by 200 bps at both ends of the range but held the EPS forecast steady. The company says inflation will be hotter than it predicted in the 2nd half and will continue to pressure margins for the foreseeable future.

The Technical Outlook: Campbell’s Bottoms On Firming Sentiment

At least 3 of the 10 analysts covering Campbell Soup Company have come out with price target increases in the wake of the earnings release. The caveat is their consensus of $49 is only 9% above the Marketbeat.com consensus which is itself below the current price action. While Campbell’s has bottomed, it looks like the rebound will leave the stock rangebound for the near term at least. Longer-term, assuming the company can continue to execute on inflationary mitigating efforts, we see CPB moving up to set a new high by the end of the year.