Campbells’ Rally Has Legs (NYSE:CPB)

Consumer Trends Have Changed, It’s In The Data

Campbell’s (CPB) has been a favorite of mine since the pandemic started. The rush to pantry-load, the ongoing lock-downs, and uncertainty over how long this thing is going to last, Campbell’s positions as a consumer staple must-have item, and its dividend all play a role in my attraction. While share prices have been buoyant since the March correction, they haven’t quite had the support of other staples leaders like Clorox (CLX). But I think that is about to change.

Today, Campbell’s reported a calendar first quarter that produced mind-boggling results for what was a ho-hum company. While the results failed to impress the analysts (results are basically in-line with consensus) investors need to remember a few things. Our new consumer trends have legs, the broad market is not finished correcting, and stable dividend-paying companies are where you need to be to protect your capital and investment returns. The analysts may not have been impressed but the results are no less impressive.

Campbell’s Organic Growth Dazzles, Revenue Surges

At the headline, Campbell’s fiscal 3rd quarter revenue missed the analyst’s consensus by $20 million. In terms of Campbell’s actual revenue, the miss is negligible, about 80 basis points, and not worth crying over. On the bottom line, GAAP EPS also fell short but that is offset by other metrics more relevant to today’s investment thesis. For one, revenue is up 14.9% from the previous year driven by product mix, increased product leverage, supply chain improvements, and cost-saving initiatives underway before the pandemic hit.

In total, margins improved by 100 basis points over the last quarter including a small offset from cost inflation and supply chain costs related to the aforementioned supply chain improvements. At the organic level, revenue is up 17% with demand for Meals & Beverages up 21%.

Looking forward, the company is expecting COVID-related strength to continue until the end of the year. Because of this, management increased guidance to a range well above the previously given and the consensus target. Campbell’s is now expecting revenue to grow roughly 6% compared to a prior target of 0.0%. EPS is also expected in a range well above consensus and likely to spur a round of upgrades from the analysts.

 "Although the effect of the COVID-19 pandemic on our sales, adjusted EBIT and adjusted EPS cannot be predicted with certainty, this revised outlook reflects our current expectation of trends through the balance of the fiscal year,"

Is That An Upgrade Tailwind I See Building?

The average analysts’ rating is still neutral but that situation has been changing over the past month. The mix of ratings has shifted ever so slightly to the bullish side and may continue to shift in that direction based on today’s results. With 9 of the current 16 ratings in neutral territory, there are plenty of analysts sitting on the fence. The risk is that price action is already slightly above the consensus target indicating a stock fairly valued or at least perceived as fairly valued by the market.

Regarding the dividend, investors can rest assured the payment is attractive and quite safe. The stock is paying $1.40 per share which comes out to about 2.70% at today’s prices. The distribution is backed up by free-cash-flow and the payout ratio is low so there is no indication a cut or halt is in the cards. After the new guidance, the payout ratio is just shy of 48% and expected to move lower over the next year. In terms of dividend growth, while Campbell’s is not well-known as a dividend grower, the overall trend in distribution growth is upward so there is some expectation of future increases.

The balance sheet isn’t what I would call a fortress but it is under control and getting better with each new quarter. The company has some debt, mostly long-term, but the balances have been falling steadily over the past few years and expected to fall further in 2020. It was just in the last quarter the company announced a number of moves that will reduce debt to the tune of $1.78 billion. Those have been completed.

The Technical Outlook: Bullish With Some Resistance To Overcome

The technical outlook for Campbell’s isn’t overly bullish in the “its strongly trending” kind of way but the market is showing some well-deserved strength and new highs are in sight. The caveat is that price action has been contained within a trading range that may dominate prices in the near to mid-term.

Now, in the bull’s favor, there are some indications that shouldn’t be ignored. For one, price action is retesting support with today’s move and that support appears to be holding. A bounce from this level should be considered bullish and trend-following. For another, the MACD and stochastic indicators are bullish and showing signals consistent with a recent move above the short-term moving average. Taken together, this points to at least a retest of the recent highs, if not the possibility of higher highs. Assuming Campbell's strength continues through the summer, and there is no reason to think it won't, I suspect the move to new highs will come in tandem with the 2^nd quarter reporting season.