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Is It Time to Buy Campbell Soup?

By Pearl Wang - Sep 16, 2020 at 9:30AM

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Recent consumer behavioral shifts are boosting demand for its products, but supply chain issues remain. Should you consider buying shares on the recent pullback?

Campbell Soup Company (CPB 0.34%) recently reported fourth-quarter (ended Aug. 2) earnings per share that were higher than the consensus estimate, and revenue that was in line. The company continued to see heightened demand in its meals and beverages segment and its snacks segment as consumers favored eating at home over dining out, largely due to COVID-19. However, shares are trading down about 13% over the last five days. Could this be a good time to consider shares of the company known for its comfort foods?

Consumer behavior and customer retention are boosting revenue

Since the onset of the coronavirus pandemic, people have been cooking and eating more at home, including snacking. These shifts have lifted demand for Campbell's products. During the third quarter (ended April 26), CEO Mark Clouse noted that, " ...unprecedented broad-based demand across our brands as consumers sought food that delivered comfort, quality, and value. This demand resulted in double-digit increases in organic sales, adjusted EBIT, and adjusted EPS". The increased demand continued into the fourth quarter.

Campbell's products lined up together on a countertop

Image source: Campbell Soup Company.

Even after the pandemic subsides and behavioral patterns normalize, Campbell's expects to retain a large percentage of the customers it acquired during the crisis. During the fourth quarter conference call, Clouse commented that Campbell's "expect to retain a sizable portion of these households driven by these sustained behaviors even as the environment normalizes over time".

The percentage of households buying Campbell's key brands was up four points for the fourth quarter, or 4% year over year. The consumer staple company believes 71% of the households will be repeat customers, which would bode well for sustained demand.

Furthermore, restrictions on restaurant dining could continue the trends of increased eating and cooking at home. It's unclear how much restaurant dining spend will be impacted by new restrictions imposed on restaurants. For example, New York City just announced the reopening of indoor dining at restaurants, but there are stringent rules imposed, including temperature checks, capacity limits of 25%, and no service after midnight.

The near-term business outlook is good

While the company increased earnings and revenue over the last two quarters, it continues to be confident about future demand. Although Campbell's did not give a full year outlook for the rest of fiscal 2021, it guided for a first-quarter net sales increase of 5% to 7% year over year, and for an earnings-per-share increase of 13% to 18%. The company expects demand for its products to remain elevated in the near term.

Beyond the recent pandemic-driven increase in demand, Campbell's products could see a lift from consumers seeking to cut expenses due to economic uncertainty. They may choose to save more money by dining out less and cooking more at home.

Supply chain issues are being addressed

The food company experienced supply challenges due to spiking product demand from COVID-19-related behavioral shifts. Management noted that " ... retailers are working hard to ensure shelves and inventories are fully replenished." Importantly, Clouse believes Campbell's will be "well-positioned to support consumer demand" for the critical upcoming soup season. However, pressure on the supply chain to meet full demand may have an impact on revenue in the first half of fiscal 2021.

The company improved capacity related to its soup products in the fourth quarter. This helped it meet its goal of better inventory replenishment. For the snacks segment, Campbell's added a new line at the Willard plant in Ohio to meet continued high demand for its potato chip and Goldfish products.

Overall, Campbell's is trading at a reasonable forward P/E of 17, below the S&P 500's forward P/E of 26. Further, the company's dividend, that was maintained through the pandemic, currently yields 3.1%. This shows Campbell's strong financial management, and is a plus for shareholders. With ongoing tailwinds of increased food consumption at home and the acquisition of new customers, Campbell's looks like a solid investment.

Pearl Wang has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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