Why Is Campbell (CPB) Up 1.1% Since Last Earnings Report?

It has been about a month since the last earnings report for Campbell Soup (CPB). Shares have added about 1.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Campbell due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Campbell Soup Q3 Earnings Beat Estimates, View Raised

Campbell Soup released third-quarter fiscal 2020 results. We note that the company’s products were bought by millions of new households, leading to a more than 6-percentage-point increase in total company household penetration in the third quarter. Notably, the company saw a double-digit rise in organic sales, adjusted EBIT and the bottom line.

Adjusted earnings surged 57% year over year to 83 cents per share, easily surpassing the Zacks Consensus Estimate of 76 cents. The upside was backed by higher adjusted EBIT and reduced interest expenses.

Net sales came in at $2,238 million in the quarter, which advanced 15% year over year. However, the top line missed the Zacks Consensus Estimate of $2,278 million. Organic sales (excluding the impact from the divested European business) grew 17% on the back of solid volumes in both Meals & Beverages and Snacks segments. This, in turn, was fueled by higher demand stemming from increased at-home consumption. 

The company’s adjusted gross margin improved 100 basis points to 34.7% on favorable product mix, enhanced operating leverage, gains from supply-chain productivity enhancements and cost-saving actions. This was partly negated by cost inflation and other supply-chain expenses (including costs associated with COVID-19). Adjusted EBIT jumped 31% to $386 million, driven by higher gross margin and sales, somewhat negated by elevated marketing investments.

Segment Analysis

Meals & Beverages: Sales in this division rose 20% year over year to $1,210 million. Excluding currency impacts, net sales grew 21%, backed by strength in the U.S. retail business. The company saw gains in Prego pasta sauces, soups, V8 beverages, Campbell’s pasta, Pace Mexican sauces and Swanson canned poultry. Moreover, the company saw sales growth in Canada. However, results were somewhat hampered by weakness in foodservice. U.S. soup sales advanced 35%, thanks to strength in condensed soups, broth and ready-to-serve soups. Further, operating earnings in the Meals & Beverages segment surged 35% on higher sales volume and improved gross profit. This was partly offset by higher marketing spend.

Snacks: Sales in this division rose 9% to $1,028 million. Excluding the divestiture impact, net sales ascended 12%, driven by higher volumes stemming from increased at-home consumption and solid base business performance. The segment gained from advancements in fresh bakery products, Goldfish crackers, Pepperidge Farm cookies, Kettle Brand and Cape Cod potato chips, Pop Secret popcorn, Snyder’s of Hanover pretzels, Lance sandwich crackers, Late July snacks, and Snack Factory Pretzel Crisps. Operating earnings in this segment elevated 19% owing to higher sales volume and enhanced gross profit, partially countered by elevated marketing expenses.

Financials

Campbell ended the quarter with cash and cash equivalents of $1,242 million, long-term debt of $5,191 million and total equity of $2,581 million. Additionally, the company generated $1,125 million as net cash from operating activities in nine months ended Apr 26, 2020. Campbell paid out dividends worth $320 million during the first nine months of fiscal 2020 at the rate of 35 cents per share.

Other Developments & Fiscal 2020 Outlook

During the quarter under review, Campbell generated savings worth $30 million as part of its multi-year, cost-saving program, which included synergies associated with the Snyder’s-Lance buyout. With this, the company has generated total program-to-date savings of $680 million. Further, management continues to anticipate cumulative annualized savings from continuing operations of $850 million by fiscal 2022-end.
 
Solid results and expectations of continued demand increases encouraged management to raise its net sales, adjusted EBIT and adjusted EPS guidance for fiscal 2020. Campbell Soup now expects both net sales and organic sales for fiscal 2020 to increase in the range of 5.5-6.5%. Earlier, both metrics were projected to be down 1% to up 1%.

Adjusted EBIT is now expected to rise 12-14% compared with the previous view of 2-4% growth. The guidance for fiscal 2020 takes into consideration gains from an additional 53rd week. Campbell now expects adjusted EPS in the range of $2.87-$2.92, which indicates growth of 25-27% from $2.30 reported in the year-ago period. Earlier, adjusted EPS was projected to grow 11-13% to $2.55-$2.60.

Fiscal 2020 includes an additional week, the impact of which is included in the guidance for adjusted EBIT, adjusted EPS and net sales.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

At this time, Campbell has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Campbell has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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