The Long and Short

Another solid quarter for Campbell Soup

| March 10, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Campbell Soup (CPB) once again reported better-than-expected quarterly results with both the top and bottom lines beating consensus estimates.  The strong results prompted management to increase full-year guidance for a second time this fiscal year. The company also noted that its cost reduction program remains on track. The strong top line growth coupled with continued cost measures led to some margin growth in the quarter. While CPB witnessed some relief in the core inflation rate on a sequential basis, annualized core inflation was 14% in the quarter.

CPB remains one of the better positioned N.A. Packaged Food & Beverage credits relative to peers. I last highlighted the front-end relationship of CPB relative to Keurig Dr. Pepper (KDP: Baa2/BBB) on December 9, as the former was trading wide to KDP, while the relationship between the two credits was reversed in the back end of the curve.  CPB now trades through KDP in the front end of the curve, a reversal that occurred in the latter part of January 2023 after Moody’s revised CPB’s outlook from stable to positive.  Given the positive outlook, there is further tightening potential for CPB relative to General Mills (GIS-Baa2/BBB), particularly in the back end of the curve where GIS trades roughly 40 bp through CPB versus between 5 bp to 10 bp in the front end of the curve.

Exhibit 1. CPB vs. GIS Spread Curve

Source: Bloomberg Trace; SanCap

Margins and Leverage Stack up Well Relative to GIS

The company’s strong fiscal second quarter organic sales growth largely came from price increases.  While the company saw some volume declines in meals and beverages, the snacks business continued to deliver volume growth. CPB witnessed margin improvement in fiscal second quarter as the EBIT margin expanded 20 bp year-over-year to 14.6% and the EBITDA margin saw 10 bp of growth to 19.2%.  Comparatively, GIS ended its fiscal second quarter with an EBITDA margin of 19.5%, representing 30 bp of growth from the year-ago period.  GIS had been outperforming CPB on a margin basis by roughly 100 bp, but CPB has closed that gap with their multi-year cost savings program. CPB noted on its earnings call that it has already delivered $870 million in savings from the program and is on track to hit its $1.0 billion target by the end of fiscal 2025.

CPB ended the quarter with total debt of $4.6 billion and total EBITDA of $1.78 billion, translating to leverage of 2.6x.  This is down from a high of 5.6x subsequent to the close of the Snyder’s acquisition in early 2018.  GIS ended the most recent quarter with total leverage of 3.0x.  GIS also saw its leverage increase post the Blue Buffalo acquisition in 2018, as leverage increased to the 4.8x area.  While both credits proactively reduced debt post acquisition, CPB has maintained a very conservative approach to shareholder rewards relative to its peer, enabling more debt reduction. Over the last 12 months, CPB returned 70% of free cash flow to shareholders relative to 109% at GIS.

Guidance raised again

Given the better-than-expected quarterly performance, CPB raised its full year guidance yet again.  Within CPB’s guidance, the company is assuming a core inflation rate for the year in the low-teens range.  That would assume further sequential declines in the back half of the year, an assumption being echoed across the packaged food sector.  CPB is hoping to offset some of the expected inflation with productivity improvements, which are being estimated in the 3% to 3.5% range.  CPB is now guiding to net organic sales growth of 8.5% to 10%, which is up from previous guidance of 7% to 9%.  CPB also increased the low end of its adjusted EBIT growth range by two percentage points and now expects adjusted EBIT to increase in the 4.5% to 6.5% range.  Adjusted EPS is now being guided to the $2.95 to $3.00 range, up from previous guidance of $2.90 to $3.00.

Exhibit 2. CPB Updated Guidance

Source: CPB Company Reports; SanCap

Moody’s outlook to positive

Moody’s revised CPB’s outlook from stable to positive earlier this year reflecting the company’s solid performance since the close of the Snyder’s acquisition.  The agency made note of both the achievement of deal synergies and successful deleveraging.  CPB essentially transformed its product portfolio having conducted multiple divestitures after the Snyder’s acquisition, shedding slower growth assets in the meals and beverages unit, including its international businesses.  While it reduced its geographic diversity, it improved the company’s growth trajectory while providing extra cash that was put towards debt reduction.  Moody’s noted that in light of the current economic environment, strong operating performance coupled with the maintenance of its conservative shareholder reward policy could lead to an upgrade. An upgrade by Moody’s to the Baa1 ratings category would be a catalyst for further spread tightening.  Moody’s maintains a stable outlook on GIS’ Baa2 rating.

Meredith Contente
meredith.contente@santander.us
1 (646) 776-7753

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles