Skip to Content
Stock Strategist

Campbell Soup's Too Hot

Input costs, brand spending, and a shifting portfolio mix will impede margin expansion.

Mentioned: , , , ,

 Campbell Soup’s (CPB) shares have soared to new heights this year, but we think the market’s hunger for soup is overheated. Campbell is poised to realize pronounced margin gains in fiscal 2016, but we think three factors could stall meaningful advances from there. First, we believe part of the recent improvement stems from commodity cost deflation, which is unlikely to prove sustainable as raw material demand persists around the world. Second, we believe Campbell will need to increase spending on product innovation and marketing--areas in which it has failed to invest to a material degree this year--to differentiate its fare and reignite its lackluster sales in this competitive landscape. Third, with its mix tilting toward natural and organics, Campbell is deriving fewer sales from the profitable soup aisle. Despite attractive growth prospects, margins for natural and organic fare are one third to one half of the soup category’s, which stands to weigh on Campbell’s profits in the longer term. As a result, we’ve taken a more pessimistic stance on the firm’s margin potential than the market has.

Cost-Cutting Wise, but Might Not Have the Legs the Market Expects
Campbell set a course last year to shed some excess fat from its operations, and it appears these efforts are yielding improvements. Through the first nine months of fiscal 2016, Campbell’s adjusted gross margins climbed 240 basis points to 37.4%, and its adjusted operating margins increased nearly 300 basis points to slightly above 19%. However, we don’t believe that all of the factors presently propping up margins will persist in the longer term, although the market seems to disagree. We think the potential for more pronounced commodity cost inflation, increased investment behind brands in an effort to withstand intense competitive pressures, and a mix shift toward the lower-margin natural and organic channel and away from the highly profitable soup category are poised to hinder material margin gains from recent levels.

Erin Lash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.