Stable, Steady, Cambell Soup Company Down On Outlook
Campbell Soup Company (NYSE:CPB) reported its fiscal 2Q earnings and shares are down because of it. In our view, this is setting an even more attractive entry for this steady, stable dividend payer and there are more reasons than one to want to own it.
Campbell Soup Company is a value, it’s got a great yield, it’s got some growth on the table, and for some reason, the shorts have piled into it. The 10% short-interest isn’t the highest on the market but it is high enough to put some pressure on price action. It’s also enough to fuel a fairly sharp short-covering rally or even a short-squeeze and we think one could be in the mix.
Campbell Soup Has Lackluster Quarter
Campbell Soup Company would have a great quarter if not for the market and its silly expectations. The $2.28 billion in revenue is up 5.6% from last year in testament to the company’s growth strategy but missed the consensus mark by 90 basis points. Growth was driven primarily by a 5% increase in organic sales that fell short of expectation by 180 basis points. Organic sales were driven by a 4% increase in volume and mix. On a segment basis, the company’s core meals and beverages unit grew 6% while the snacks segment only 4%.
Moving down, there is some mixed news in regards to the margins as well. The company experienced a contraction in gross margin that was more than expected but offset by gains at the operating level. The gross margin contracted 0.1% to 34.3% while the operating margin improved 40 basis points to 17.2% and 30 basis points above the consensus.
The good news is on the bottom line but you have to see it from the right perspective. The adjusted $0.84 and GAAP $0.80 in earnings were both in-line with expectations on less-than-expected revenue. The takeaway is the company is building earnings leverage.
Guidance for the year is lackluster as well. The company is guiding a range with a midpoint slightly above the consensus target but one that is calling for YOY revenue decline. The range is -3.5% to -2.5% but there is a sliver-lining. The leverage we mentioned earlier is evident in the EPS guidance which is expecting 3% to 5% YOY growth, and revenue will be negatively impacted by one less week in fiscal 2021. That’s worth about 200 basis points of sales right there.
Campbell Soup Company Is A High-Yield Value
Campbell Soup Company is trading about 15X of its earnings with a yield above 3% making it one of the most attractive consumer staples from that perspective. The catch is the company isn’t one with a long or robust history of dividend increases so we don’t expect one of those soon. That said, the 3.15% yield is safe enough with a 48% payout ratio and a relatively sound balance sheet to back it up.
The Technical Outlook: Campbell Soup Company At Bottom Of Range
Shares of Campbell Soup Company are trading at the bottom of their range and showing signs of support. In our view, this is a combination of bargain hunters and short-covering that will likely keep price action from falling much further, if at all. In the near-term, we expect to see shares of CPB continue to move sideways within the range with the potential for upward bias. A move above the short-term EMA may be bullish but the market would face resistance at the $48 and $49 levels. Longer-term, we see these levels slowing giving way to higher prices with an ultimate target above the $55 range.
