In 1869, a commercial canner named Abraham Anderson joined forces with a vegetable vendor named Joseph Campbell. In no time, the duo had a hit product: canned beefsteak tomato soup. In 1922, the company couldn't deny the importance of soup to its business any longer, and officially renamed itself the Campbell Soup Company (CPB -1.15%).
For Campbell, soup is its middle name -- literally! Its importance to the company can't be denied. However, today, 42% of its profits come from a food business it got into a lot later. And fortunately for shareholders, sales in that part of the business are growing at a much faster rate.
Campbell's surprising other business
In 1961, Campbell Soup did a very un-soup-y thing: It acquired a baking business called Pepperidge Farm. The company has never been the same since -- and that's a good thing.
One year after the acquisition, Campbell launched the Goldfish brand from Pepperidge Farm, sending the company on its way to becoming a snacking powerhouse. In addition to Goldfish, the company now owns such well-known snack brands as Snyder's pretzels, Lance crackers, Pop Secret popcorn, and Cape Cod potato chips.
During Campbell's fiscal 2023, which ended in July, nearly 48% of its net sales came from snacks. The remaining 52% came from its meals and beverages unit, of which soup is just one component.
When it comes to operating profits, snacks are equally crucial for Campbell. In its fiscal 2023, snacks had an operating profit of $640 million, which was almost 42% of the company's total profits.
Now, some might point out that meals and beverages are still more important for Campbell, and that's technically true. However, net sales for meals and beverages only grew 7% year over year in fiscal 2023, while net sales for snacks were up 13%. Therefore, it might not be much longer before snacks are the bigger sources of revenue and profits.
To be fair, sales volumes declined in both of Campbell's business segments in its fiscal 2023. However, volumes declined less for snacks than for meals and beverages. And this shouldn't be surprising -- the snack market simply presents a better growth opportunity. That's why companies such as Hershey are also diversifying into snacks.
What this could mean for investors
When looking at Campbell's stock price performance over the last decade, there's an undeniable relationship between that and the company's operating income. This shouldn't be surprising -- stock prices tend to follow business fundamentals over the long term.
The chart below shows that, despite some ups and downs, overall, Campbell's stock hasn't done much. But the company also failed to sustainably grow its operating income much either.
Perhaps this is about to improve for Campbell. At its investor day presentation at the end of 2021, the company noted that its profit margins for its snack division trailed the industry average. Therefore, the company was aiming to improve its operating margin for snacks to 17% by fiscal 2025.
In its fiscal 2023, Campbell's snack segment had an operating margin of just 14.4%. And in the first quarter of its fiscal 2024, the company's snack segment had an operating margin of 14.5%. So it still has work to do.
The delta between 14.5% and 17% looks small on paper. But Campbell's snack business is close to a $5 billion annual business. Therefore, achieving its margin improvement goal would result in more than a $100 million gain in annual operating income -- that's a big deal.
And that's only if Campbell's snack revenue is stagnant. If it grows, the profit boost could be bigger.
There's reason to think that Campbell's snack revenue will grow. According to multiple sources, the industry is poised for growth. For example, Statista projects that snack sales in the U.S. will grow at a nearly 4% compound annual rate through 2030. That would provide a modest tailwind to Campbell.
Right now, Campbell stock is relatively inexpensive. Its price-to-earnings ratio of 16 is cheaper than the market average and lower than its own historical average. And its dividend yield is higher than normal at about 3.4%. That's a good starting point. If it can boost its profits with help from its snack business, shares would likely rise from this reasonable level.
It might not be a market-beating idea, but for those who own it already, Campbell stock is worth holding onto. And for those who don't own it yet, the company's snack business makes it an intriguing stock to watch because it provides the potential for growth and profit improvement.
