Why Campbell Soup's Earnings Pop May Not Last

Campbell Soup Company CPB shares jumped Friday after the company reported a fourth-quarter earnings beat.

Despite the positive initial reaction to the numbers, one analyst said Friday that the Campbell earnings pop could be a selling opportunity.

The Analyst

Bank of America Merrill Lynch analyst Bryan Spillane reiterated an Underperform rating on Campbell with a $36 price target. 

The Thesis

Campbell’s earnings beat was mostly due to upside in both net sales and operating margins, Spillane said in a Friday note. (See his track record here.) 

Campbell guided for fiscal 2020 sales growth of between 1% and 3% and adjusted EPS of between $2.50 and $2.55, below Spillane’s forecast of $2.56.

Given that fiscal 2020 has an extra week compared to fiscal 2019, the analyst said sales growth will automatically get a 2% boost, suggesting actual revenue growth will be roughly flat.

Campbell shares are are trading at a slight premium to peers at 17.8 times forward earnings, but Spillane said the stock should actually be trading at a significant discount to the average 16.0 PE ratio of the packaged foods group.

“In our view, the lower multiple is warranted due to the potential for 2020 to have no growth as the company implements a new strategy,” he said.

In addition to growth struggles, the analyst said Campbell’s $9.6 billion in debt will likely continue to weigh on the stock’s valuation.

Campbell shares were trading 5.17% higher at $45.56 at the time of publication Friday. 

Benzinga’s Take

Campbell’s strong quarter is evidence that management is doing a great job making the most of a difficult situation. However, given the stock’s full valuation and Campbell devoting all excess cash flow to paying down debt, there isn’t a clear near-term catalyst for additional upside.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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