Input inflation, brand reinvestment needs, and a business mix shift all contribute to our more muted outlook for the company, says Morningstar's Erin Lash.
Erin Lash: Since the start of the year, wide-moat Campbell Soup shares have soared to new heights as the firm is poised to realize pronounced margin gains this year. But we think the market's favor for soup is a bit overheated and contend three factors stand to stall meaningful margin expansion off of these levels.
For one, a portion of the recent improvement has been driven by commodity cost tailwinds. But we think bouts of unfavorable weather, as well as global demand for raw materials, is likely to prop up raw material inflation at a mid-single-digit rate annually longer term.
Second, we think that Campbell will need to increase its spending behind both marketing as well as research and development as a means by which to differentiate its fare amid the intensely competitive landscape in which it plays.
Finally, while Campbell has taken steps to tilt its mix of offerings toward natural and organics, which boasts favorable growth prospects, the margin profile for natural and organics is more muted at one third to one half the mid-20s the soup category boasts.
In combination, these factors stand behind our more muted margin outlook for Campbell Soup, and with shares trading at more than 20% premium to our valuation, we fail to warm up to the stock.
