An Underrated Cost Savings King With A 2016 Outlook

• Campbell Soup Company CPB shares are up 7.94 percent year-to-date, and touched their 52-week high of $50.70 on August 14.
• Citi’s David Driscoll upgraded the rating on the company from Sell to Neutral, while raising the price target from $45 to $50.
• Although further downside appears limited, Campbell Soup’s current stock valuation reflects anticipated margins and earnings improvements, Driscoll said.

Analyst David Driscoll mentioned that Campbell Soup’s shares have appreciated despite the company’s poor performance in F2015. The shares have benefitted from a higher re-rating of large-cap packaged food multiples this year.

The company is poised to benefit from improved F2016 results, driven by sizable cost saving opportunities and a moderate input cost inflation environment. “Specifically, CPB sees F16 COGS inflation of just 2%-3%. This should be offset by ongoing productivity savings, which will in turn allow reduced overheads stemming from CPB’s zero based budgeting (ZBB) program to drive earnings growth,” the Citi report stated.

The EPS estimate for F16 has been raised from $2.53 to $2.58 to reflect incremental Zero-based budgeting savings and the lapping of F15 supply chain issues.

“While soft top line trends remain a concern for the US packaged food sector, we believe Campbell should be able to grow earnings over the coming years behind its ZBB program,” Driscoll wrote.

The analyst expects the stock to trade close to its fair value at current multiples with “an improvement in US soup consumption trends required to drive meaningful appreciation.”