Can Pretzels Really Reignite Campbell Soup Company’s Growth?

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CPB stock - Can Pretzels Really Reignite Campbell Soup Company’s Growth?

Source: Carlo Villarica via Flickr (Modified)

Once in higher demand, the aisle where Campbell Soup Company (NYSE:CPB) products reside has become a great cut-through to the milk in the back of the store. And CPB stock has suffered lately as a result.

More people are eating at the margins of the store than in its center, taking prepared food, fresh produce and milk home instead of cans of Prego, Pace Picante sauce or Swanson’s broth. Plopping some Campbell’s condensed tomato soup in a saucepan, adding water and popping open some Pepperidge Farm’s crackers — that’s for grandma.

To help solve this problem, the company plans to pay roughly $4.9 billion for Snyder’s-Lance Inc (NASDAQ:LNCE). Will this help CPB stock make a comeback?

Most analysts doubt it.

The deal seems to point more toward Campbell’s problems than its possible resurgence. CPB stock barely moved on this news, and it remains a laggard in a rising market.

The Problem With CPB Stock

The Snyder’s-Lance deal is worth $6.1 billion, when debt is included, and combined with Campbell’s current $2.26 billion in long-term debt, on $7.75 billion in assets, it has Moody’s considering a downgrade. The investment service says the deal raises the company’s debt/EBITDA ratio (Earnings Before Income Taxes, Depreciation and Amortization) to 5 — well beyond what it can see for an A3 debt.

That is before synergies. Once Snyder’s-Lance is brought into the fold, Campbell’s CEO Denise Morrison can be expected to get some savings out of duplicated back-office and delivery systems. Snyder’s trucks visit the same convenience stores that truckers depend on for their Campbell’s soup fix. Maybe those vending machines with Lance’s crackers might want some cups of soup to go with them?

Retail analyst Brian Sozzi at TheStreet is sour on CPB stock. Return on Invested Capital has declined steadily since 2011, he writes, ever since Morrison became CEO, and the stock has risen at barely one-third the rate of other S&P 500 stocks.

This is the biggest deal in Morrison’s CEO career and the biggest in Campbell’s history, but is it transformative, or just a bolt-on to a jalopy?

The Potential for Campbell’s

This is the point in the economic cycle when stocks like CPB stock are at their most unpopular. They don’t hold all their value in a downturn; Campbell’s fell from $37-per-share to $27-per-share during the Great Recession of 2008-2009, but it had nearly regained those levels by the middle of 2010, while many of today’s go-go stocks were barely getting their feet back under them.

Despite the worries of Moody’s, CPB’s debt is not under pressure. The company generates over $1.2 billion in operating cash flow during the average year, and Snyder-Lance generated nearly $250 million more last year, making the combined long-debt of $3.7 billion relatively easy to lift. Campbell’s also pays out about $400-million-per-year to service a dividend of 35-cents-per-share. It can handle its obligations.

The Snyder’s-Lance deal did create a move in Campbell’s debt. It made it more valuable. Bonds selling at $102-per-$100-principal last week are now selling at $105-per-$100.  The market isn’t worried.

Bottom Line on CPB

The real question is not whether Campbell’s can afford this deal, but whether Morrison can perform, and whether the economy will sour enough for CPB stock to look good to defensive investors.

This is not the time in the economic cycle when anyone urging a defensive strategy is going to be popular, but I have one … it’s my contrarian nature. If you share that defensive outlook, it might be time to give CPB stock a second look.

If you’re a go-go investor, however, just pass Campbell’s by. Soup is not for you right now, even with pretzels.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/can-pretzels-really-reignite-campbell-soup-companys-growth/.

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