A Top Growing Soup Company

In this article, let's take a look at Campbell Soup Company (CPB, Financial), a $13.44 billion market cap company, which is a major producer of branded soups and other grocery food products.

Soup and more

Campbell has a dominant competitive position in the U.S. and controls about 60% of the wet soup category. Its operating margins in this category are more than 20% which are especially attractive. The company focuses not only soup but also other products like Pace Mexican salsa, Prego pasta sauce, V8 juice beverages and Pepperidge Farm cookies and crackers.

Reshaping its business

In order to offset the principal risk, which is an environment with lower consumer spending, the company´s plan to invest in its brands is appropriate for long-term growth.

The firm plans to reshape its portfolio and so decide to invest in order to reshape its portfolio and expand internationally as well.

Acquisitions and divestitures

We have already said that the company is reshaping its business. As a matter of fact, it has made three acquisitions in the past one year and a half, and one divestiture as well. If we think of the acquisitions, they are expected to contribute more than $1 billion of annual revenue.

Plum Organics (a U.S.-based manufacturer of premium organic foods intended for babies and children) and Kelsen Group (a Denmark-based manufacturer of baked goods) are examples of the firm´s acquisitions.

Anotther long-term growth driver will be the international markets. However, results in Russia and China were not so good, and better results are expected.

Revenues, margins and profitability

Looking at profitability, revenue grew by 7.48% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.43 vs $0.37). During the past fiscal year, the company increased its bottom line. It earned $2.32 versus $2.16 in the previous year. This year, Wall Street expects an improvement in earnings ($2.47 versus $2.32).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 56.86% which is higher than the one exhibit by the industry median. Although its peers, such as: Pilgrims Pride (PPC, Financial), Tyson Foods (TSN, Financial) and McCormick (MCK, Financial) have good levels, Campbell surpasses those levels. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Hershey (HSY, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 16.5x, trading at a discount compared to an average of 22.5x for the industry. To use another metric, its price-to-book ratio of 8.28x indicates a premium versus the industry average of 1.93x while the price-to-sales ratio of 1.63x is above the industry average of 1.05x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $15.358, which represents a 9.0% compound annual growth rate (CAGR).

Final comment

Campbell will continue investing in its core brands, which generate more than $100 million in sales. Other initiatives are related to improve supply chain efficiency, while making efforts in reducing costs, such as closing two plants and eliminating more than 700 positions.

The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund guru Joel Greenblatt (Trades, Portfolio) added this stock to his portfolio in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned