On Monday one of the most anticipated earnings releases was that of the world’s largest soup maker Campbell Soup’s (CPB) first quarter. The company reported earnings per share of 87 cents, although sales were a little lower than expected coming in at $2.2 billion, a decline of 2.1% from a year ago. Even though sales declined, the quarter topped analysts’ estimates by six cents thanks to aggressive cost cutting and better input prices. The company saw declines in prices of grain, tomatoes and tin plate, as overall the cost of goods sold fell 7%. Also, CPB made a point of reducing SG&A expenses by 7% as well. Overall, the results were better than expected and the stock is trading 1% higher early on Monday afternoon.
This quarter’s strong performance has prompted management to raise guidance for the balance of the year. Much of the optimism comes from beneficial foreign exchange rates, as the falling dollar makes Campbell’s products more attractive overseas. Sales growth is now expected to come in about 4% to 5% and earnings growth should come in at 9% to 11%. Based on fiscal 2009 EPS results of $2.21, the company is forecasting earnings in the range of $2.41 to $2.45. The forward looking P/E multiple is a very reasonable 14.2x.
At Ockham, we are reaffirming our Undervalued rating on Campbell Soup because its valuation remains attractive based on our methodology. For example, the company currently trades below its historically normal range of both price-to-sales and price-to-cash earnings. Furthermore, we see the recent increase to the quarterly dividend of 10% as a positive from a shareholder perspective. Campbell’s is stepping up their marketing effort as the winter approaches, and the colder times of year are normally better for sales. With experts calling for one of the coldest winters in recent memory, we think that this stock makes a nice addition to a portfolio looking for a defensive stock that still has upside.
