It's a reflection of just how pessimistic investors are about packaged food stocks that Campbell Soup (NYSE:CPB) dramatically underperformed the market in 2017. In fact, the owner of leading snack and food brands including Swanson, Pepperidge Farm, and V8 recently dipped to levels shareholders haven't seen since 2015.
There are usually good reasons behind a bearish turn like that by Wall Street. So let's look at whether the recent slump is an opportunity for investors to buy the stock -- or an indication to avoid this business for now.
If you're looking for robust sales growth, Campbell Soup isn't your stock. Organic sales declined by 1% in 2017 to mark the second straight full year of reduced revenue for the packaged food giant. That weak result is about on par with what rivals like J.M. Smucker (NYSE:SJM) are enduring right now.
According to management, there are a few issues that together make this an especially hard time to sell branded foods. "The operating environment for the packaged foods industry remains challenging," CEO Denise Morrison said in late August, "due to shifting demographics, changing consumer preferences for food, the adoption of new shopping behaviors and the dynamic retailer landscape." Campbell Soup has operational challenges to deal with, too, including an underperforming fresh food segment and recent moves by big retailers to slash soup prices.
Put that all together, and you get a weak outlook for growth. For fiscal 2018, Morrison and her team are projecting a third consecutive year of reduced sales volumes. Revenue should range between flat and a 2% decline, they said in late November.
The picture doesn't get much brighter with respect to earnings growth. Sure, Campbell Soup has been protecting profits through its efficiency initiatives. However, these savings aren't doing much to offset rising food and supply chain costs. Instead, gross profit margin fell by over 2 percentage points in the most recent quarter, to 36.2% of sales.
It isn't likely that these trends will quickly improve, either. Companies are understandably reluctant to raise prices during slow-growth periods like this, even as their costs increase. They'd prefer to keep volumes inching higher at the expense of earnings -- and that's exactly what investors are witnessing today. Campbell Soup's latest forecast calls for adjusted profits to drop by about 3%, or a bit worse than the 1% sales decline executives are projecting.
Why pass on this stock
The good news is the stock's valuation reflects these tough business prospects. Investors can purchase shares at less than 17 times earnings today, which is a price they haven't seen since early 2015. Campbell Soup is also valued at a discount to rivals, at 1.8 times sales compared to 2 times sales for J.M. Smucker. Meanwhile, the snack food giant's dividend is in no danger since it takes up less than half of annual earnings. That means income investors can safely count this 3% yield as an important part of their expected returns going forward.
But even a large dividend payment won't make up for persistent underperformance by a stock, and that scenario seems likely given the broad growth challenges Campbell Soup faces. Investors who buy the stock today might benefit from the deep pessimism around its business if conditions improve. I'd prefer to watch from the sidelines, though, at least until the company can show that it can return to sales growth. This business is looking at its third straight year of declines, instead, and so the stock price discount seems justified.