December 24, 2014 Campbell Soup Company Current Recommendation NEUTRAL Prior Recommendation Underperform Date of Last Change 03/12/2014 Current Price (12/23/14) $44.62 Target Price $47.00 SUMMARY DATA (CPB-NYSE) SUMMARY Campbell made a robust start to fiscal 2015 with both top and bottom lines improving year over year and coming ahead of the Zacks Consensus Estimate. The bottom-line results mainly benefited from strong revenue growth along with its brand expansion and cost containment strategies. Campbell s focus on augmenting the North American soup and simple meal business, and expanding overseas operations bode well for future growth. We believe that the company s prudent investment and strategic initiatives toward product innovation and brand building will increase its customer base and profitability. However, we prefer to be on the sidelines because of the rising commodity costs, intense competition and exposure to foreign currency fluctuations, which may undermine the company s operating performance. Therefore, we maintain our long-term Neutral recommendation on the stock. 52-Week High $46.61 52-Week Low $39.84 One-Year Return (%) 7.07 Beta 0.39 Average Daily Volume (sh) 2,055,670 Shares Outstanding (mil) 313 Market Capitalization ($mil) $13,981 Short Interest Ratio (days) 12.17 Institutional Ownership (%) 42 Insider Ownership (%) 42 Annual Cash Dividend $1.25 Dividend Yield (%) 2.80 5-Yr. Historical Growth Rates Sales (%) 2.4 Earnings Per Share (%) 1.3 Dividend (%) 4.7 using TTM EPS 17.1 using 2015 Estimate 18.1 using 2016 Estimate 17.1 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * 2014 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606 Low, Type of Stock Large-Growth Industry Food-Misc/Dvrsd Zacks Industry Rank * 174 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Oct) (Jan) (Apr) (Jul) (Jul) 2013 2,336 A 2,333 A 2,094 A 1,723 A 8,052 A 2014 2,165 A 2,281 A 1,970 A 1,852 A 8,268 A 2015 2,255 A 2,243 E 1,977 E 1,713 E 8,188 E 2016 2,260 E 8,386 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Oct) (Jan) (Apr) (Jul) (Jul) 2013 $0.88 A $0.70 A $0.62 A $0.43 A* $2.64 A 2014 $0.66 A $0.76 A $0.62 A $0.49 A $2.56 A 2015 $0.74 A $0.70 E $0.58 E $0.45 E $2.47 E 2016 $0.76 E $2.61 E Projected EPS Growth - Next 5 Years % 5 (Note: Qtly. fig. may not add up to annual fig. due to discontinued operations and rounding off.)
OVERVIEW Based in Camden, NJ, Campbell Soup Company, together with its subsidiaries, is a worldwide manufacturer and marketer of high-quality, branded convenience food products. The company was instituted as a business corporation on Nov 23, 1922 under the laws of New Jersey. Its brands are sold in approximately 120 countries, and its principal geographies include North America, France, Germany, Belgium, and Australia. The widely-recognized brands of the company include Campbells, Pepperidge Farm, V8, Pace, Prego, Swanson, Arnotts, Kelsen, Kjeldsens and Plum Organics. Campbell Soup reports its results of operations in 5 reportable segments: U.S. Simple Meals comprises the company s U.S. Soup and U.S. Sauces businesses. It includes condensed and ready-to-serve soups, Swanson broth and stocks, Swanson canned poultry, Pace Mexican sauces, Prego pasta sauces, Campbell s canned gravies, pasta and beans, and Plum Organics food and snacks. U.S. Beverages includes V8 juices and beverages, and Campbell s tomato juice. Global Baking and Snacking includes Pepperidge Farm cookies, crackers, bakery and frozen products in the U.S. retail; Arnotts biscuits in the Asia Pacific and Australia; and Kelsen cookies globally. International Simple Meals and Beverages consists of the retail business in Canada and the simple meals and beverages business in Asia Pacific, China and Latin America. Bolthouse and Foodservice includes the company s Bolthouse Farms carrot products, including fresh carrots, juice concentrate and fiber; Bolthouse Farms super-premium refrigerated beverages and refrigerated salad dressings; and the North America Foodservice business. Equity Research CPB Page 2
REASONS TO BUY Portfolio Change to Drive Long-Term Growth: In an attempt to enhance its brand portfolio and accelerate future growth, Campbell has resorted to acquisitions and joint ventures. As a result, the company acquired three new growth engines in fiscal 2014 including Bolthouse Farms, Plum Organics and the Kelsen Group, which provide for combined annual sales of nearly $1 billion. The trio has been performing up to the mark, contributing about one point of organic sales growth in firstquarter fiscal 2015. Further, its entry into joint ventures with Grupo Jumex and Conservas La Costena in Mexico has enhanced its manufacturing and distribution capabilities along with its presence in the global market. The company also plans to launch over 200 new products in fiscal 2015. We expect this to bring significant changes in the company s portfolio, providing exciting new brand platforms to create value and attract new consumers, thus improving the its long-term top-line growth prospects. Strategic Initiatives to Increase Customer Base and Profitability: Campbell intends to boost its top line and increase return on investment through strategic frameworks. It made significant progress in this direction, including stabilization of the North American soup and simple meal business, overseas expansion as well as growth of the healthy beverages and baked snacks businesses. We believe that Campbell s prudent investment and strategic efforts toward product innovation and brand building will lead to an increase in its customer base and profitability. Improving Asset Utilization: In order to optimize its asset utilization while reducing supply chain costs in the U.S., Campbell shut down a couple of its U.S.-based manufacturing units last year. The company expects this move to result in better usage of its U.S. plant network by diversifying its manufacturing capabilities, lowering total delivered costs and enhancing flexibility in its manufacturing units. Moreover, the aforementioned closures are expected to result in annual pre-tax savings of about $30 million, starting fiscal 2016. Further, with the sale of its European simple meal business for $542 million in the second quarter of fiscal 2014, Campbell has made clear its intentions to move away from its troubled canned soup business and to focus on capturing the packaged fresh food market. The additional liquidity generated from the divestment has helped the company in lowering its debt burden. REASONS TO SELL Challenging Economic Conditions: Though food and beverage is one of the most attractive and largely profitable markets in the world, it is also the most challenging. The North American food industry has seen sluggish growth and slowdown in consumption over the last few quarters. The food industry is witnessing changes in consumer preferences (for example, toward health and wellness products) as well as spending shift toward more economical products. Rising Commodity Prices May Hamper Future Performance: The raw and packaging materials used in the company s business include tomato paste, grains, beef, poultry, vegetables, steel, glass, paper and resin. Many of these materials are subject to price fluctuations due to a number of factors. In addition, rising commodity prices may undermine the company s future performance. Risk of Operating in Overseas Markets: Due to its exposure in the international markets, Campbell remains prone to currency fluctuations. In the recent past Australian and Canadian dollars have weakened against U.S. dollars, thus weighing upon the company s top-line. The company s first-quarter fiscal 2015 sales reflected 4% growth year over year, 100 basis points lower, including foreign currency impact. Despite concluding first-quarter fiscal 2015 with strong results, the company has lowered its fiscal 2015 sales, adjusted EBITDA and adjusted earnings per share guidance, Equity Research CPB Page 3
mainly to reflect the negative impact of foreign currency translation. Further, the weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside the U.S. An increase in menu price may have a direct impact on consumer demand. RECENT NEWS Campbell Cuts Fiscal '15 View Despite Strong Q1 Earnings Nov 25, 2014 Campbell Soup Company made an encouraging start to fiscal 2015, with better-than-expected firstquarter results. The company s adjusted earnings from continuing operations for the quarter increased approximately 12% year over year to $0.74 per share and came a penny ahead of the Zacks Consensus Estimate. On a reported basis, too, the company s earnings of $0.74 per share represents an increase of 30% from $0.57 earned a year ago. Net sales increased 4% to $2,255 million in the quarter from $2,165 million in the prior-year quarter. Quarterly revenues also surpassed the Zacks Consensus Estimate of $2,222 million. Organic sales grew 5% year over year. During the quarter, volume and mix contributed 6% to total sales growth, partly offset by the negative impact of 1% each from currency fluctuations and higher promotional spending. Adjusted gross margin of 34.7% declined 130 basis points (bps) from the prior-year quarter level of 36%, mainly due to cost inflation, increased promotional expenditure and higher supply chain costs, partly offset by productivity enhancements, favorable mix and benefits of lapping last year s Plum recall. In the reported quarter, marketing and selling expenses decreased 5% year over year to $247 million thanks to lower advertising and consumer promotion expenses. Administrative expenses fell 9% to $135 million on the back of lower long-term incentive compensation costs and cost savings related to prioryear restructuring initiatives. Adjusted earnings before interest and tax (EBIT) increased 9% year over year to $368 million mainly attributable to the benefit of the absence of last year s Plum recall and reduced administrative and marketing expenses, partly offset by reduced gross margin. Segment Analysis U.S. Simple Meals: First-quarter sales at this division increased 8% year over year to $928 million. This was mainly attributable to an increase in volume and mix. Sales for U.S. soup and Campbell s condensed soups rose 6% each, broth sales soared 17%, ready-to-serve soup stayed flat and other simple meals grew 14%. Growth in other simple meals can be traced to increased sales of Plum, Prego pasta sauces and Campbell s dinner sauces Operating income rose 15% year over year to $242 million, primarily driven by volume growth, enhanced productivity and lower administrative and marketing expenses, partially offset by cost inflation and increased supply chain costs. U.S. Beverages: Sales at this division dipped 3% year over year to $168 million due to a 2% negative impact from both unfavorable volume and mix and increased promotional spending, offset by a 1% increase in price and sales allowances. Sales gains in V8 Splash beverages were more than offset by a decline in V8 V-Fusion beverages and V8 vegetable juice. Equity Research CPB Page 4
The segment s operating income in the quarter jumped 8% to $26 million from the year-ago period primarily driven by lower marketing expenses, offset by gross margin contraction and volume declines. Global Baking and Snacking: This segment s sales increased 3% to $627 million. The benefit of a 6% rise in volume and mix due to increased Arnott s sales in Australia and Indonesia were offset by a negative impact of 1% from unfavorable currency exchange rates and 3% from higher promotional spending. The segment s operating income increased 15% year over year to $90 million, primarily due to volume gains, improved productivity and absence of purchase accounting adjustment related to last year s Kelsen acquisition, offset by increased promotional expenses. International Simple Meals and Beverages: Sales of this segment fell 2% to $189 million, as the benefit of a 6% rise in volume and mix were partially offset by a negative impact of 5% from currency translation, 1% from higher promotional expenses and 2% from accounting related costs. The segment witnessed sales decline in Latin America that fully offset the sales gain in the Asia Pacific and Canada. The segment s operating income fell 20% year over year to $16 million mainly due to higher marketing and administrative expenses and negative currency effects, marginally offset by volume increases. Bolthouse and Foodservice: This segment comprises Bolthouse Farms and the North America Foodservice businesses. This division's quarterly sales were $343 million, up 4% from the comparable year-ago quarter, driven by favorable volume and mix of 4%. Volume gains reflected double-digit growth in Bolthouse Farms premium refrigerated beverages and salad dressings. Sales in North America Foodservice remained flat with the prior-year quarter. Further, the company s operating income for the quarter declined 24% year over year to $22 million due to gross margin contraction that was partly offset by lower administrative expenses and volume gains along with lesser advertising expenses for the Bolthouse Farms brand. FY15 Outlook Despite concluding first-quarter fiscal 2015 strongly, the company reduced the low-end of its fiscal 2015 sales, adjusted EBIT and adjusted earnings per share guidance mainly to reflect the negative impact from currency translation. However, the company retained its organic growth guidance. Campbell now expects fiscal 2015 sales growth to range between flat and up 2% instead of the previous forecast of 1% 2% growth. Further, adjusted EBIT is projected in the range of -1% to 2% growth compared with growth of flat to 2% guided earlier. Adjusted earnings for the fiscal are expected in the range of -1% to 2% growth compared with the previous forecast of flat to up 2%. This implies earnings per share in the range of $2.42 $2.50 compared with $2.45 $2.50 guided earlier. VALUATION At its current price, Campbell s trailing 12-month earnings multiple is 17.1x compared with the 22.4x industry average and 19.1x for the S&P 500. Moreover, the stock is trading at a discount to the industry average, based on forward earnings estimates. Over the last 5 years, Campbell s shares have traded in the range of 12.6x to 18.4x trailing 12-month earnings. Our target price is $47.00 or 19.0x of fiscal 2015 EPS. Equity Research CPB Page 5
Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Campbell Soup Company (CPB) 18.1 17.1 4.3 12.5 17.1 18.4 12.6 Industry Average 24.0 31.7 10.0 13.8 22.4 84.3 16.0 S&P 500 17.7 16.6 10.7 16.0 19.1 19.6 12.0 Ajinomoto Co., Inc. (AJINY) N/A N/A N/A 13.3 29.5 41.1 13.8 Tingyi Cayman Islands Holding Corp. (TCYMF) N/A N/A N/A 0.3 29.6 43.2 25.4 United Natural Foods, Inc. (UNFI) 26.2 23.2 14.6 22.1 29.6 32.6 18.4 Seaboard Corp. (SEB) N/A N/A N/A 15.7 16.3 22.1 5.9 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Campbell Soup Company (CPB) 8.9 13.6 7.9 53.2 1.4 2.8 10.6 Industry Average 3.8 3.8 3.8-109.7 0.4 1.1 7.8 S&P 500 7.2 9.8 3.2 23.3 N/A 1.9 N/A Equity Research CPB Page 6
Earnings Surprise and Estimate Revision History Equity Research CPB Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CPB. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1139 companies covered: Outperform - 15.9%, Neutral - 77.8%, Underperform 6.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research CPB Page 8