We don't expect the trend to abate anytime soon for this wide-moat packaged-food maker.
Erin Lash, CFA
10:00 AM | Email Article
Sales growth has proved elusive across the packaged-food landscape over the past several quarters, and wide-moat Campbell Soup
has yet to rise above its peer set. The firm chalked up a 1% top-line erosion in the fourth quarter (on an organic basis, driven by lower volumes and unfavorable mix), marking its 11th consecutive quarterly decline, and there is little to suggest these trends will abate in fiscal 2018 (as management’s guidance calls for sales to hold flat or fall up to 2%). A portion of this retreat will stem from its inability to secure promotional shelf space during the all-important soup season at a leading U.S. retailer, which is likely to curtail Campbell’s soup sales (weighing on consolidated results to the tune of 1%).
Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.
We’ve long held that brand investment (in terms of bringing value-added new products to market and touting that fare to consumers) is crucial to differentiating products in this competitive category, reigniting top-line performance, and supporting brand intangible assets (particularly retail relationships). However, Campbell again pulled back the reins on marketing and advertising spend (tumbling 12% to just 10% of sales, down from nearly 12% in the year-ago quarter). While this reduction contributed to a 190-basis-point expansion in adjusted operating margins to 16.9%, we don’t believe using this lever to bolster profitability is prudent for the long-term health of the business (and it may ultimately impair its retail relationships).
We intend to review our underlying assumptions and will likely ratchet our $53 fair value estimate down by a low- to mid-single-digit percentage to reflect a bleaker near-term sales outlook, but don’t foresee a material change in our long-term forecast (calling for 2% sales growth and operating margins approaching 19% by the end of our 10-year explicit forecast). While shares traded down following results, the risk/reward doesn’t strikes us as sufficient to warrant building a position at this time.
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