Pessimism in the stock market could represent a buying opportunity for investors. However, investors should be careful not to fall into a value trap. Recently, Campbell Soup (NYSE:CPB) has experienced a significant drop of 6% to $39.30 per share amid its sluggish earnings results and cloudy business outlook. Let's take a closer look to see whether or not investors should enter Campbell Soup after the price drop.
Disappointing results and cloudy outlook
In the first quarter, Campbell's sales dropped by 2%, while organic sales decreased by 4%. Earnings per share came in at $0.54, 31% lower than the $0.78 reported in the first quarter of last year.
The company mentioned that its depressed first-quarter earnings were due to several factors, including reduced inventories at U.S. retailers, weakness in its core business, front-load marketing investments to promote new product launches in Soup and Simple Meals and build the Bolthhouse Farms brand, and the recall of Plum Organics pouch products.
Along with the declining first-quarter performance, Campbell lowered its guidance for fiscal 2014, with projected sales growth of 4%-5% and adjusted EPS growth of 2%-4%.
These three factors might drive Campbell Soup forward
There are three factors which could drive Campbell Soup's operating performance in the future. First is its diversified powerful brand portfolio of around 10 brands, supported by the recent acquisition of Bolthouse Farms, Plum Organics, and Kelsen. Second, the company will keep its focus on cost-reduction initiatives to drive productivity and sustainable growth.
In the past two years, Campbell Soup has divested four plants and streamlined its North American business to improve supply chain efficiency, creating an annual cost savings of $40 million. Interestingly, despite the declining performance, Campbell Soup showed its confidence in the business' future by increasing its quarterly dividend by 7.6%. At $39.30 per share, Campbell Soup gives investors a sweet dividend yield of 3.2%.
Campbell's peers General Mills (NYSE:GIS) and Mondelez International (NASDAQ:MDLZ) also offer investors decent dividend yields at 3% and 1.6%, respectively. However, what makes me worry about Campbell Soup is its high payout ratio, meaning that the company pays a high amount of earnings into dividends, at more than 80%. General Mills has a more reasonable payout ratio at 51%, while Mondelez's payout ratio is the smallest at only 35%. The high payout ratio could restrict Campbell Soup to reinvesting back into the business to drive growth and profitability in the future.
General Mills and Mondelez could be better picks
In contrast to Campbell Soup's sluggish performance, General Mills experienced double-digit growth in both its top and bottom lines for fiscal 2013. The main growth drivers were the European, Asian-Pacific, and Latin American regions.
In the first quarter 2014, its International business had nice growth of 25% on a constant currency basis, fueled by a nearly 200% rise in revenue in Latin America. Looking forward, General Mills also expects its sales to rise at a low-single digit, driven by new product innovations and incremental contributions from the new businesses. The adjusted diluted earnings could come in a range of $2.87 to $2.90 per share.
In terms of growth, Mondelez has many significant advantages over General Mills and Campbell Soup because of its huge exposure to emerging markets, which accounted for more than 45% of its total revenue. The business growth in emerging markets has been quite impressive, at 9.4% in Q1, 9.7% in Q2, and 10.7% in Q3, driven mainly by the double-digit increase of the BRIC (Brazil, Russia, India, and China) markets.
The company holds the global market-leading positions in chocolate, biscuits, and candy. What might attract investors as well is its commitment to return cash to shareholders.
Since the beginning of the year, the company has returned around $1.5 billion to shareholders. Along with the increase in dividend, it just authorized a $6 billion share-buyback program, creating a good buyback yield of 10% for its shareholders.
My Foolish take
After the recent drop, Campbell Soup is still not so cheap at an EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple of 11.4. This company is not quite attractive with the high payout ratio and sluggish operating performance.
I would prefer General Mills with its more reasonable payout ratio and the similar EBITDA multiple. Investors might also pick Mondelez because of its huge exposure to growing emerging markets, decent dividend yield, and upcoming sizable share repurchases.