Campbell Soup: A Return To Growth In 2016

• Campbell Soup Company CPB shares are up 9 percent year-to-date, despite having declined 3 percent over the past month.
• Morgan Stanley’s Matthew Grainger maintained an Underweight rating for the company, while raising the price target from $45 to $47.
• After the company reported broadly in-line Q4 results, Grainger said that the shares appear fully valued, citing limited long-term growth prospects and ongoing margin mix headwinds.

Campbell Soup reported its 4Q EPS at modest $0.43, modestly beating the consensus estimate of $0.42. This was a seasonally small quarter, and underlying results were broadly in-line with expectations.

Campbell Soup generated 1 percent organic sales growth, partly due to a benefit from favorable inventory movements in Soup. Gross margin improved by 180 bps year-over-year to 36.1 percent in the company’s strongest quarter for GM expansion in six years. Margins benefited from MTM hedging favorability, cost savings and favorable net inflation dynamics.

Analyst Matthew Grainger commented, “Despite 4Q15’s gross margin favorability and the company’s outlook for limited net inflation (3% productivity, offsetting COPS +2-3%) and continued promotional discipline in the upcoming year, the company expects only modest GM expansion.”

Campbell Soup projected that it would reach its revised long-term constant currency targets of 4-6 percent EBIT growth and 5-7 percent EPS growth in FY16. A currency headwind of 200 bps is expected to offset a 100 bps sales and EBIT contribution from the Garden Fresh acquisition.

In the report Morgan Stanley noted “While this remains a positive development after several years of limited EPS growth, the company’s topline growth outlook – while ahead of many center-store peers and exhibiting stability in Simple Meals and Global Baking & Snacking – also appears constrained by selective headwinds such as sales declines in US Beverages, Int’l Simple Meals, and Bolthouse carrots and slowing growth in Indonesia/China.”

The EPS estimate for 2016 has been raised from $2.53 to $2.77 to reflect the expectation of favorable pension restatement. The EPS estimates for 2017 and 2018 have been raised from $2.66 to $2.93 and from $2.81 to $3.09, respectively.

Grainger added that the stock appears “more than fully valued in light of limited L-T growth prospects and ongoing margin mix headwinds.”