Should I Buy Campbell Soup? 3 Pros, 3 Cons

by Tom Taulli | August 22, 2012 12:36 pm

cpb1 Should I Buy Campbell Soup? 3 Pros, 3 Cons[1]Campbell Soup (NYSE:CPB[2]) isn’t exactly an exciting company. Yet its stock has been providing some nice returns for investors. Over the past year, the gain is about 15%. In fact, the company recently hit a 52-week high.

Consider that the food analysts[3] at Goldman Sachs (NYSE:GS[4]) recently upgraded their rating on Campbell’s from a sell to a buy. A key reason is that the company is in the early stages of a major transformation.

So, should you consider the stock as well? To decide, here’s a look at the pros and cons:

Pros

Powerful Platform. In North America, Campbell has brands like Prego, Pace, Pepperidge Farm and Swanson. It also has strong brands in global markets, such as Arnott’s, Devos Lemmens and Erasco. Campbell actually sells its products in over 100 countries.

Leadership. Last August, Denise Morrison came on board as Campbell’s new CEO — and she has wasted little time. A big part of her focus has been on product innovations. Just two examples are the Moroccan Style Chicken with Chickpeas and Chunky Chipotle Chicken & Corn Chowder Soup[5].

Morrison has also focused on cutting-edge marketing approaches. To this end, she has leveraged Facebook (NASDAQ:FB[6]), Twitter and other social platforms.

Acquisitions. With its strong cash flows, Campbell is in a good position for dealmaking. And yes, Morrison has already been getting aggressive. For example, she recently shelled out $1.5 billion for Bolthouse Farms[7], which focuses on healthy fruit juices.

Cons

Soup Business. The segment has been tough to turnaround. Then again, the Campbell’s brand is somewhat dowdy. Keep in mind that the soup business still accounts for about 35% of revenues.

Competition. Campbell has major rivals like H. J. Heinz (NYSE:HNZ[8]) and Kraft (NYSE:KFT[9]). But it’s also pressured by private-label offerings, such as from major operators like Wal-Mart (NYSE:WMT[10]). These have become more popular as consumers look for cheaper alternatives.

Commodities Prices. Campbell is a huge buyer of raw materials like tomato paste, grains, beef, poultry, vegetables, steel, paper and resin. No doubt, these items are subject to major fluctuations in prices. While Campbell will generally increase prices on its products to blunt the impact, this strategy is limited, especially as the global economy slows down.

Verdict

All in all, Morrison has been making the right moves. Consider that she’ll launch over 50 products by fourth quarter, which should be a big boost. Her marketing efforts also appear to be getting traction. She’s making a big push to reach the Millennials, which represent about 80 million consumers.

The valuation for Campbell’s is also reasonable, with a price-to-earnings ratio of 15. Oh, and the dividend is a healthy 3.5%.

So in light of all these factors, the pros outweigh the cons on the stock.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[11], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling”[12] and “All About Commodities.”[13] Follow him on Twitter at @ttaulli[14]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/06/cpb1.jpg
  2. CPB: http://studio-5.financialcontent.com/investplace/quote?Symbol=CPB
  3. food analysts: http://blogs.marketwatch.com/thetell/2012/08/13/goldman-says-go-long-j-m-smucker-campbell-soup/
  4. GS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GS
  5. Chunky Chipotle Chicken & Corn Chowder Soup: http://investorplace.com/2012/06/campbells-is-full-of-flavor-for-next-year/
  6. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  7. $1.5 billion for Bolthouse Farms: http://investorplace.com/2012/07/campbell-soup-to-purchase-bolthouse-farms-for-1-55b/
  8. HNZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HNZ
  9. KFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=KFT
  10. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  11. IPOPlaybook: http://investorplace.com/ipo-playbook/
  12. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  13. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  14. @ttaulli: https://twitter.com/ttaulli

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