Campbell Soup Earnings: Despite Near-Term Profit Hit, Increased Brand Spending Should Aid Long Term

Campbell Soup CPB posted fair results in its seasonally small fourth quarter (5% organic sales and a 180-basis-point pullback in adjusted operating margin to 11.7%). But these were overshadowed by the implications of its fiscal 2024 outlook—organic sales flat to up 2% and $3.09-$3.15 in adjusted EPS, which generally square with our respective 1.4% and $3.03 preprint estimates. To be sure, Campbell is facing stepped-up competitive intensity amid a weakening consumer spending backdrop that could weigh on near-term sales and profits, but cost pressures appear to be abating, with management calling for just low-single-digit inflation this year (on top of double-digit increases each of the past two years).

In order to ensure its products stand out at the shelf, we are encouraged that management seems unwavering in its commitment to funnel additional resources behind its brands; advertising spending was up 23% in the quarter, while research and development was 13% higher year over year. From our vantage point, this showcases that Campbell remains intent on executing its strategic playbook (leveraging technology, data insights, and artificial intelligence to aid its efforts to bring to market consumer-valued new products), which we see as judicious. But we don’t think management will retract on efforts to remove complexity from its operations, invest in automation, and optimize its supply chain and manufacturing network, which should afford the fuel to further its brand spending. In this context, we continue to forecast it will direct 5% of sales (around $500 million) on average annually to research, development, and marketing over the next 10 years.

When taken together, we don’t expect any change to our $61 fair value estimate (beyond time value) or our long-term outlook (around 2% organic sales growth and high-teens operating margins). With the stock trading at a 30% discount to our intrinsic valuation, we think investors should warm up to shares of this wide-moat name.