Here's Why Hold Strategy Is Apt For Campbell (CPB) Stock Now

Campbell Soup Company CPB is progressing well on its cost-savings plan as is evident from the annualized savings target of $500 million, to be achieved by the end of fiscal 2020. Moreover, cost-saving efforts along with other initiatives helped the company to deliver earnings beat in second-quarter fiscal 2018, after three straight misses. Sales returned to positive surprise after lagging estimates in the past four quarters.

However, these initiatives were not enough to counter the stock’s dismal performance. Shares of the company have lost 13.5% in the last three months, wider than the industry’s decline of 8.7%. So let’s see whether this Zacks Rank #3 (Hold) stock will be able to regain momentum and is apt for your portfolio on the basis of the strategic endeavors.

 

Campbell Poised to Grow on Cost-Savings Plan

As mentioned earlier, Campbell is well on track with its cost savings plan, which was announced in fiscal 2015. In fact, the company’s strategy of concentrating on supply chain efficiencies along with curtailing costs and reinvesting part of these savings in areas with high growth potential is likely to drive growth. In the recently-reported quarter, it generated savings of $20 million, thereby bringing the program-to-date savings to $365 million. Consequently, Campbell expects cost savings program to deliver $75-$85 million of savings in fiscal 2018, which is incremental to the productivity gains from ongoing supply chain initiatives. Also, its prudent investment and strategic efforts toward product innovation and brand building are likely to boost profitability.

Strategic Acquisitions

In an attempt to enhance its brand portfolio and accelerate future growth, Campbell remains keen on making acquisitions. Of late, the company acquired leading organic broth and soup producer, Pacific Foods, in a drive to expand in the fast-growing organic food space. This marks the company’s fifth buyout in the last five years. Moreover, it unveiled plans to purchase Snyder’s-Lance, Inc., which is anticipated to substantially enhance the company’s snacking business. Also, this buyout will be the largest in Campbell’s history. Following the completion of the Snyder’s-Lance buyout, management is expected to shift its portfolio toward faster-growing categories, and snacking will contribute roughly 46% to the company’s overall annual net sales.

Robust Q2 Earnings & Outlook Underscore Strength

Recently, Campbell reported solid second-quarter fiscal 2018 results, wherein both earnings and sales topped estimates and improved year over year. Also, management updated its fiscal 2018 outlook to include the effects of the Pacific Foods buyout as well as the Tax Cuts and Jobs Act. Adjusted earnings are now envisioned in the band of $3.10-$3.17 per share, representing increase of 2-4%. The Zacks Consensus Estimate is currently pegged at $3.10, up 5 cents in the last 30 days.

Headwinds Pulling Campbell’s Shares Down

Despite these positives, Campbell has been struggling due to weak margins on account of higher cost inflation, escalated supply chain expenses and adverse mix. For fiscal 2018, the company expects gross margin to contract nearly 1 percentage point on higher inflation and logistics costs as well as the cost impact of increased soup promotional spending.

Furthermore, Campbell witnessed soft organic sales in the fiscal second quarter. This can be attributed to lower volumes in the Americas Simple Meals and Beverages segment owing to the persistent challenges in U.S. soup category. The U.S. Soup sales decline in the quarter was due to a drop in condensed and ready-to-serve soups. Also, Campbell’s failure to reach an agreement with a key customer on a promotional approach for soup in fiscal 2018, contributed to the decline. Additionally, the company’s C-Fresh division disappointed owing to headwinds in the super premium juice category.

All said, we expect Campbell’s robust strategies to offset these concerns. Also, as the company is working on clearing the terms with the aforesaid customer, it expects sales declines in the U.S. soup category to be moderate in the second half of fiscal 2018.

Want Solid Picks in the Same Industry? Check These

Post Holdings, Inc. POST has a long-term earnings growth rate of 14% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

US Foods Holding Corp. USFD, also a Zacks Rank #1 stock, has a long-term earnings growth rate of 16.1%.

United Natural Foods, Inc. UNFI pulled off an average positive earnings surprise of 10.7% in the last four quarters. The stock also sports a Zacks Rank of 1.

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