Should You Stock Up on Campbell’s For the Winter?

In our recent analysis of Mead Johnson Nutrition following an insider purchase at that company, we noticed that Campbell Soup Company (NYSE:CPB) appeared to be undervalued despite a solid growth performance in its most recent quarter. The company is best known for its soup products but also owns brands such as Pepperidge Farm, Prego, and V8. Campbell Soup’s fiscal year ended in July. Revenue for the year was about flat compared to the fiscal year ending in July 2011, and net income was down 5%. However, this does include some expenses from restructuring and in addition a reduced share count resulted in earnings per share only decreasing by a penny- from $2.42 to $2.41. In the fourth fiscal quarter, results were considerably better as the company delivered 27% higher earnings than a year earlier off of a flat top line. Shortly after the fiscal year end, the company completed the $1.6 billion acquisition of Bolthouse Farms, which produces fresh carrots and other health food products.

At a market capitalization of $11 billion, Campbell Soup Company trades at 15 times trailing earnings. The company’s earnings per share are expected to grow steadily- based on analyst estimates, the current-year P/E is 14 and the forward earnings multiple (for the fiscal year ending in July 2014) is 13. This seems like a moderately fair price on a value basis, though we’d prefer to see earnings growth even if it was associated with a slightly higher multiple. Campbell Soup, unsurprisingly, is also a good defensive pick: its beta of 0.2 indicates that its stock price has only a weak relationship with broader market indices, and the stock pays a dividend yield of 3.3%.

RENAISSANCE TECHNOLOGIES

However, hedge funds were not very excited about Campbell Soup Company, at least in the second quarter of the year. Renaissance Technologies, founded by billionaire Jim Simons, had the largest position out of all the funds and other notable investors which we track in our database of 13F filings at 1.1 million shares- a $36 million position, fairly small compared to other positions that the giant multibillion-dollar hedge fund owns. See some of Renaissance Technologies’ favorite stocks. Billionaire David Harding’s Winton Capital Management increased its stake by 78% to a total of about 380,000 shares (find more stock picks from Winton Capital Management).

Campbell Soup’s closest peers are General Mills, Inc. (NYSE:GIS) and H.J. Heinz Company (NYSE:HNZ). These stocks also have very low betas: Heinz’s is 0.3 and General Mills’ is actually 0.0. Their dividend yields are close to Campbell Soup’s as well, so any of the three would make a good choice for an investor who needs protection from a market downturn and also wants reliable dividend payments. Perhaps surprisingly for such stable stocks, each of these peers experienced double-digit earnings growth rates in its most recent quarterly report versus a year earlier. On an earnings basis, these companies look to trade at slight premiums to Campbell Soup: their forward P/E multiples, based on fiscal years ending in May and April of 2014, are 14 and 15 respectively. This isn’t that much of a difference; while the fastest-growing General Mills is the most appealing to us, they all look worthy of further consideration.

Kellogg Company (NYSE:K) and spices and condiments provider McCormick & Company, Incorporated (NYSE:MKC) are two additional packaged foods companies. Kellogg is generally in the same category as the three stocks that we had previously discussed, though its net income was down 12% in the second quarter of 2012 versus the same period in 2011. At 15 times forward earnings estimates, we see no reason to buy it when the more attractive choices are available. McCormick’s revenue was up 6% and its earnings were up 14% in the fiscal quarter ending in August compared to the same quarter last year, though the market is pricing considerably more growth into the company than these other peers: it trades at 21 times trailing earnings and at 18 times consensus estimates for the fiscal year ending in November 2013. Again, that pricing seems too high compared to Campbell Soup, General Mills, or Heinz.

Those three companies look like moderately good values, and certainly could serve as more stable positions to complement stocks with more exposure to the economy. Investors should take a look at all three and decide on what would make a good addition to their portfolio.

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