Value investing is all about finding good companies that are selling for less than they're worth. The task is all about intrinsic value, which is the real underlying value of a business and a stock's intrinsic value might be more or less than the going rate offered by the stock market. Value investing means finding stocks whose intrinsic values aren't being properly appreciated by other investors.
But that doesn't mean every cheap stock is an automatic buy. In fact, many stocks that look like compelling value opportunities can turn out to be value traps. In other words, underperforming businesses are often cheap for a reason, which is that their future growth prospects are likely to disappoint. This justifies their current "cheapness."
One stock that looks cheap on the surface is Campbell Soup (NYSE:CPB), which definitely qualifies as cheap for a good reason: the company isn't growing. Here are a few reasons why Campbell is a value stock that value investors should avoid.
Campbell suffering from the shifting consumer
Consumers in the United States are slowly turning to fresher foods in the grocery aisles. The past few years have seen a boom in demand for organics, and a shunning of prepackaged, canned, and shelf-stable foods. All of this is causing Campbell Soup's business to erode. The company has made a number of moves to combat this trend, but its turnaround hasn't materialized.
Campbell's biggest segment is its U.S. simple meals unit, which houses the flagship "Campbell's" condensed soup, as well as ready-to-serve soups and broths. These products are falling out of favor with consumers, who are turning against canned foods now perceived as having little nutritional value.
This segment alone makes up 35% of Campbell's total annual revenue. Sales in that business grew 3% last year, thanks to an aggressive marketing push. But this is far from spectacular, as the company benefited from a 53rd week of sales in its recently completed fiscal 2014. And higher costs actually resulted in the segment's earnings falling by 2%.
This is all having a material impact on Campbell's financial fortunes. Fiscal 2014 and the company's guidance for fiscal 2015 were both far from impressive. In fiscal 2014, sales rose 3% and operating profit was flat versus the prior year. These results were obviously weak, and that's even with the extra week of sales. Its comparable performance was even worse than it seems. Excluding the benefit of the extra week, Campbell's revenue was basically flat and operating profit declined.
Campbell doesn't expect things to improve in the current fiscal year. For fiscal 2015, sales are expected to grow 1%-2%, and adjusted earnings per share are projected flat to up 2%.
Campbell is late to the party
In response to a challenging environment, Campbell sought to reinvigorate its product portfolio by launching a broad line of organics. It is now releasing its first batch of organic products. The company will release some old favorites as organics, including chicken noodle and tomato soup, but will also expand into new organic varieties. In addition, Campbell will ditch the can for many of these products, and instead use a carton, which it believes better preserves taste and freshness.
To be fair, Campbell entered into organics last year with its acquisition of Plum Organics. But this was a small deal that has not added significantly to Campbell, because Plum Organics makes up a tiny portion of the overall company. The acquisition of Plum added 3% to full-year sales in the U.S. simple meals segment, but clearly that wasn't enough to offset the declines in Campbell's larger businesses.
Because of this, Campbell's initiatives seem to be too little, too late. Unless the company pursues a much more meaningful, large acquisition of an organic competitor, its financial struggles will continue. This is reflected in the company's weak outlook for the upcoming year.
Campbell looks like a value opportunity. The stock trades for 16 times trailing earnings per share and 16 times forward EPS estimates. Investors can't count on multiple expansion, since Campbell's multiples are not all that low considering its very low earnings growth. At this point, investors should count on Campbell's 3% dividend yield, and not much else.
Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.