Investors looking for bargains often look at stocks that are trading near their 52-week lows. Campbell Soup (CPB -0.37%) is in the middle of its 52-week range and beats the average consumer-staples stock (using Vanguard Consumer Staples ETF as a marker) in performance over the past month. That strong showing is thanks at least partly to a strong fiscal 2023 second-quarter (ended Jan. 29) earnings performance.
If you expand beyond near-term performance, though, the iconic soup maker is still well off its highs and severely lagging behind its peers.
Campbell Soup hit a rough patch
If you go back to the middle of the last decade, food maker Campbell Soup stock still trades down around 20% from highs set then. Going back to the start of the period, the stock is up just shy of 30% compared to a 90% gain for Vanguard Consumer Staples ETF. In other words, despite the strong recent performance, Campbell Soup still looks like an absolute and relative laggard over the longer term. This raises the obvious question: "What went wrong?"
Image source: Getty Images.
A big piece of the answer is that the company's products, notably soup, fell out of favor. In an attempt to get growth back on track, management at the time tried to reshuffle the company's brand portfolio. Without getting into all the gritty details, the effort didn't go quite as well as hoped. Some of the new brands were fairly quickly jettisoned, and the CEO behind the new direction left the company.
That said, not all of the acquisitions proved to be duds. Campbell made a good call when it bought snack maker Snyder's-Lance in 2018. Snacking has been an increasingly popular trend among consumers, and this acquisition provided Campbell Soup with a strong position in the space. But the less desirable deals left a bad taste in investors' mouths, and the company's debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) level peaked well above previous norms.
Things are getting better for Campbell Soup
The company is working on the debt issue and, after a period of worrying leverage levels, brought the debt-to-EBITDA level back into a more normal range. Earnings were a little volatile, particularly during the pandemic hit in 2020 when consumer buying patterns were disrupted by the work-from-home and social-distancing trends. However, things look better of late.
CPB Financial Debt to EBITDA (TTM) data by YCharts.
That's actually fairly impressive, given the outsized inflation that consumer-staples stocks deal with at the moment. That left Campbell Soup, and its peers, hiking prices and cutting costs to try to stay ahead of its own rising ingredient, salary, and supply chain costs. But given the strong fiscal Q2 2023 earnings results, it looks as if Campbell Soup has a solid handle on the headwinds here.
Specifically, Campbell Soup's organic sales rose 13% year over year in the quarter with price hikes more than offsetting volume losses (a normal trade-off when increasing product prices). Through the first six months of 2023, organic sales jumped 14% year over year. Adjusted earnings rose 16% and 15%, respectively. In the most recent quarter, adjusted gross margin actually improved 30 basis points. That may not sound like much, but with inflation running so high, it is a notable success. Campbell beat Wall Street expectations on both the top and bottom lines. And management increased the company's full fiscal year 2023 sales guidance and increased the low end of its earnings range.
One or two quarters probably aren't enough to call a new trend, but it is pretty clear that Campbell Soup is performing better than it was just a few years ago. That's helping to improve the mood of investors here. But the stock is still notably off from its peak and behind its peers. Does that mean it's trading at a bargain price?
The dividend yield, at around 2.8%, isn't exactly high by historical standards, but it isn't low, either. Meanwhile, the price-to-book and price-to-earnings ratios are below their five-year averages, while the price-to-sales and price-to-cash flow ratios are above. About fairly valued is, perhaps, the final call right now.
What to do about Campbell Soup stock?
It is hard to suggest that Campbell Soup is a screaming buy, even as business performance seems to be improving. And yet, with the stock so far behind the average consumer-staples stock over the past decade, there's potentially room for the shares to play "catch up." It might be worth the time for conservative long-term investors to dig deeper into the story here, but rushing in to buy might not be the best call. The business backdrop remains fluid, and the valuation here seems to have already priced in a fair amount of good news. Unless the pace of the business uptrend continues to pick up, it is hard to see why the stock should become an even hotter commodity on Wall Street.
