Campbell Soup Co. Targets Fiscal Q4 Stock Recovery

Key Points

• Campbell Soup Co.'s acquisition of Sovos Brands, which includes Rao's pasta products, Michael Angelos frozen entrees, and Noosa yogurt products, is driving top and bottom growth.
• Sequential product volume/mix improvements, EBIT, and adjusted EBITDA indicate that consumer recovery is underway.
• Campbell Soup Co. raised its fiscal Q4 2024 EPS guidance to $3.07 to $3.10 versus $3.04 consensus estimates, citing the pace of consumer recovery and the impact of Sovos Brands sales growth.

Global food and beverage company Campbell Soup Co. NYSE: CPB reported solid earnings accompanied by raised guidance, but the market continued to sell off shares. However, clues were sprinkled throughout its earnings presentation that indicate a return of growth acceleration is coming in the second half of the calendar year. Prudent investors taking note of these developments may consider adding shares to their portfolio before full transparency materializes.

Campbell Soup operates in the consumer staples sector, competing with other food and beverage producers like General Mills Inc. NYSE: GIS, Hormel Foods Co. NYSE: HRL, and WK Kellogg Co. NYSE: KLG.

Campbell Soup’s Portfolio Goes Beyond Soup

With a name like Campbell Soup Co., it would be easy to mistake the company for solely a soup maker. Campbell is an iconic name and brand, but it has diversified its portfolio of brands way beyond soup into two divisions: Meals & Beverages and Snacks.

The Meals & Beverages division manages popular brands like Prego, Swanson frozen entrees, V8, Pace salsas, Campbell’s soups and sauces, Pacific Foods, and SpaghettiOs. 

The Snacks division manages popular brands like Goldfish, Lance, Synder’s of Hanover, Pepperidge Farm, Late July, and CAPE COD and KETTLE potato chips.

Expansion of Campbell's Portfolio through Sovos Brands Acquisition

Campbell has continued to expand its portfolio by completing its acquisition of Sovos Brands. They make Rao’s pasta sauces, Michael Angelo’s frozen entrees, and Noosa yogurt products. Campbell added a new unit called Distinctive Brands under its Meals & Beverages division to manage the Sovos products. The company has noted it may actually consider selling Noosa since it's not part of its core food categories.

CPB Stock is Attempting to Break Out of a Bearish Descending Triangle

The daily candlestick chart for CPB displays a potential descending triangle breakout pattern. The descending trendline formed at the $46.97 top on May 16, 2024, capping bounce attempts at a lower high until meeting the flat-bottom lower trendline support at $42.23. The Q3 2024 earnings release could muster the strength even to test the descending trendline as shares had to coil back up off the lower trendline. CPB is attempting to break out above the descending trendline at $43.53. The daily relative strength index (RSI) is rising to the 48-band. Pullback support levels are at $41.67, $40.77, $39.65, and $37.94.

Campbell's Solid Earnings Results for Fiscal Third Quarter 2024

On June 5, 2024, Campbell Soup Co. reported fiscal Q3 2024 EPS of 75 cents versus 70 cents consensus estimates, indicating a 5-cent beat. Adjusted EPS rose by 10% YoY. Revenues rose 6.3% YoY to $2.37 billion, beating $2.34 billion consensus analyst estimates. Adjusted gross margins rose 30 bps YoY, supported by cost savings initiatives, supply chain productivity enhancements, and a favorable mix.

Positive Impact of Sovos Brands on Campbell's Fiscal Q3 2024 Results

Sequential net sales growth and volume and mix improvements helped to drive double-digit growth in adjusted earnings before interest and taxes (EBIT) and adjusted earnings per share (EPS).

Organic net sales stabilized while volumes improved sequentially. Campbell indicated that its Meals & Beverages division showed stable performance while Snacks had some pressure, reflecting the pace of the consumer recovery.

The Snacks division is on track to meet the fiscal 2024 operating margin target of 15%, driven by improving consumer demand over the next several quarters. The addition of Sovos Brands has progressed well, adding noticeable growth to the headline results for fiscal Q3 2024.

Consumers are Focused on Stretching Meals, Playing Right into Campbell’s Wheelhouse

Campbell believes the consumer's focus on stretching meals is benefiting its soups portfolio, fueling sustained demand in its Meals & Beverages division. Inflation pressures keep uncertainty elevated as higher prices can cause consumers to trade down Campbell's premium brands for private-label substitutes. However, Campbell's portfolio, especially with the addition of Sovos brands, is holding up well enough to raise its guidance.

The Sovos Brands Acquisition Drives Campbell's Raised Guidance

Campbell Soup provided upside guidance for the fiscal full-year 2024 EPS of $3.07 to $3.10 versus $3.04 consensus analyst estimates. It sees fiscal full-year 2024 revenues growing 3% to 4% to $9.64 billion to $9.73 billion versus $9.6 billion consensus analyst estimates. The growing success of Sovos brand products definitely helped raise the guidance. Organic sales growth is tracking between 0% and 1%, matching the pace of the consumer recovery.

Dilution from the acquisition of Sovos Brands is expected to impact EPS by 1 to 2 cents. Campbell Soup Co. expects to build momentum in the fiscal Q4 2024 (next quarter) with continued stabilization of its YoY volume growth and double-digit growth for Q4 adjusted EBIT and adjusted EPS.

Campbell Soup CEO Mark Clouse commented, ”It is exciting to see the positive impact on the business from adding Sovos Brands. In Q3, on a pro forma basis, we see a 200 basis point improvement in top-line volume and mix growth. Looking at the now combined Campbell's, we would rank among the fastest volume-driven growth companies in the food sector over recent periods. As integration progresses, we expect to realize further top-line and bottom-line benefits.“

Campbell Soup analyst ratings and price targets are at MarketBeat. Consensus price targets indicate 5.28% upside to $46.31.