By acquiring Pacific Foods, the wide-moat firm is continuing its push into health and wellness.
Erin Lash, CFA
08:23 AM | Email Article
is continuing its pursuit of expanding within the health and wellness realm by acquiring Pacific Foods in a $700 million all-cash deal. However, the tie-up, valued at just north of 3 times fiscal 2017 sales, is not material enough to sway our $53 per share fair value estimate (at around 2% of Campbell’s total sales base) or our long-term assumptions for around 2% average annual sales growth and more than 200 basis points of operating margin expansion to 18% by fiscal 2026. Shares of this wide-moat operator trade in line with our valuation, and we’d suggest investors await a more attractive entry point.
Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.
Despite the small size of the deal, we think it is strategic, providing Campbell with another means of bolstering its shelf space in the natural and organic aisle, which has been winning out at the expense of traditional center-store categories (growing at a midteens rate, far in excess of center-of-the store categories, where growth has remained tepid). Further, we aren’t surprised Campbell would opt to ink a tie-up, as its own attempts to garner a larger foothold in the space (with the launch of its organic line in 2015 and its Well Yes! brand, a line of soup with simpler ingredients) have failed to gain much traction with consumers. However, we aren’t blind to the fact that despite the high growth, margins for organic fare are more muted at one third to one half of the mid-20s the traditional soup category boasts, weighing on Campbell’s consolidated profitability in the longer term.
We’ve expected Campbell would apportion its excess free cash flow (which averages in the low-double-digits as a percentage of sales annually) to make acquisitions. And we doubt that its thirst for deals has been quenched. But in our view, Campbell has been a prudent capital allocator in the past (returns on invested capital have exceeded our cost of capital estimates in each of the past 10 years), and we think it will continue operating with this level of discipline.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.