Why Buying Campbell Soup Company Will Leave You Hungry for Growth

Food companies like Campbell Soup (NYSE: CPB  ) and ConAgra Foods (NYSE: CAG  ) operate extremely stable business models. After all, it goes without saying that people need to eat. The end result is that their businesses are essentially a double-edged sword. In times of economic recession, their sales and profits stay afloat and their stocks perform relatively well because of the simple fact that people need food. However, the opposite is true as well. When the economy recovers, they usually miss out on outsized growth. 

The most recent earnings report out of Campbell Soup is a good example of this. Its shares slumped after the company posted unimpressive third-quarter results and laid out a weak future outlook. Campbell is a highly profitable company with a solid dividend, but investors hungry for growth can probably do better elsewhere.

Earnings that won't whet your appetite
In all, Campbell Soup racked up $1.97 billion in third-quarter sales. This was roughly flat performance year over year. The company did manage 7% growth in adjusted earnings per share, primarily benefiting from cost cuts. Among its core business segments, there's a striking disparity among Campbell's core geographic markets.

It's doing fairly well domestically, as sales in its simple meals division rose 7%. In addition, it benefited from its acquisition of Plum Organics. Sales of sauces in the United States jumped 25%, and the acquisition contributed 14 percentage points of that growth.

By contrast, Campbell isn't doing so well in other parts of the world. The company's international simple meals and beverages units posted a 17% drop in sales. Campbell is spending heavily to boost its presence in international markets, but its promotional activity isn't gaining much traction.

This continues a longer trend for Campbell, which is its struggle to grow in the aftermath of the 2008 recession. Campbell was a pillar of stability while the broader economy was brought to its knees, but it hasn't produced much growth at all in the years since. To illustrate, consider that the company's profits from continuing operations actually declined from 2009-2013 from $736 million in 2009 to $680 million last year.

Other food companies like ConAgra have displayed similar results over the past few years. Like Campbell, ConAgra's profits were lower last year than in 2009. To be exact, the company's net income is down 13% in that time, due mostly to the effects from discontinued operations.

Campbell's outlook and valuation leaves much to be desired
Unfortunately, Campbell Soup doesn't see itself on the cusp of strong growth due to the inevitable saturation of the food industry in general. After releasing third-quarter results, Campbell cut its full-year sales outlook and modified its profit forecast as well. Campbell now expects 3% growth in organic sales this year, down from its prior outlook which called for 4%-5% organic sales growth.

Profits are likely to suffer as well. Management expects full-year earnings per share to be at the low end of its guidance of 2%-4% growth. This is fairly low growth, especially for Campbell, because the stock holds a relatively rich valuation.

Campbell trades for approximately 17

times its trailing twelve-month adjusted EPS and 17 times its forward fiscal 2014 adjusted EPS . With such low earnings growth expected going forward, it doesn't seem like Campbell is a very compelling opportunity. To its credit, Campbell does pay a solid dividend, and the company gave investors a 7.5% dividend hike last year. At recent prices, Campbell yields 2.8%.

Still, a less-than 3% dividend yield and earnings growth only in the low- to mid-single digits doesn't seem to provide enough total return potential to justify Campbell's valuation. While it remains a profitable company with a decent dividend, there are better opportunities out there.

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