Buy, Sell or Hold: Keep Your Portfolio Healthy With Campbell Soup Co. (NYSE: CPB)

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On June 1 of last year I recommended buying Campbell Soup Co. (NYSE: CPB). It was a contrarian call at the time, since many brokers and independent analysts had rated the stock a "hold."

That's because most analysts think of Campbell the same way they think of many other consumer staples businesses - as a stable, slow moving business with no real short-term catalyst for growth.

You see, very few remember the tremendous upside that Warren Buffet realized when he invested in another "dull" staples business, The Coca-Cola Co. (NYSE: KO), just prior to a major overseas expansion.And it's precisely that kind of campaign Campbell has mounted - expanding its businesses in Russia, China, and other emerging economies to great success.

As investors, we too have been rewarded. CPB's stock is up 22% since my original recommendation, and had actually risen as high as 35% before some consolidation.

Indeed, it's important to remember that Campbell's foreign expansion brings significant benefits in an era of volatile exchange rates.Currently, the company's sales concentration in the United States exposes it negatively to weakness in the U.S. dollar. And because the dollar has been on a downward trajectory for most of the year, the exchange rate has negatively impacted Campbell's earnings.

Still, the company's market dominance and superior brand loyalty allowed it to overcome this liability. Now, the recent strength of the U.S. dollar will put the wind at Campbell's back. But not for too long, since CPB's international diversification will eventually bring the company into a currency-neutral environment. Russia and China will drive this effort.

Russia, the largest per capita consumer of soups in the world, is likely to grow some 5% next year. And Campbell's deal with Coca-Cola Hellenic Bottling Co. SA to distribute its soups in 100 more cities in Russia - which began in August - is likely to deliver a very nice outperformance for Campbell's when the company reports earnings on Feb. 22. The cold Russian winter will do its trick abroad, while the tough economic situation in the United States will continue to drive sales at home.

China's growth also is expected to outperform its government's 8% target for next year, thanks in part to the increasing urbanization of its population. The same is happening in most emerging economies.

Indeed, with just 30% of the company's sales coming from abroad, Campbell is only beginning to penetrate markets where the consumption of soup and other packaged foods is accelerating. We are looking at the just the beginning in terms of growth potential for this company.

Meanwhile, Campbell is quickly adapting to the maturing U.S. baby-boomer population with more low-sodium and reduced-fat products. Expanding its 70% market share in soup products in the United States will be difficult, but this commanding position translates into 25% operating margins for the company's soup business, which is about half of its sales. This is a mammoth margin in the food industry and greatly helps Campbell's cashflow.

Campbell is a keeper from a fundamental standpoint, but what about the valuation and technicals?

While CPB's forward price-to-earnings (P/E) ratio of 13 is attractive, analysts are not factoring enough growth into it, and therefore their price-to-earnings-to growth (PEG) ratio appears to be artificially high.Despite adverse currency effects, Campbell's conservative management lead the company to beat earnings estimates in November, improve profit margins and raise both sales and earnings guidance, validating my views. Campbell's gross margins are an astounding 40%, and it's likely to keep surprising to the upside in both sales growth and margin expansion.

Finally, the stock consolidated right to the 200-day exponential moving average (EMA) on some profit-taking driven by the fiscal year's end, which was Aug. 2. That makes the stock oversold today, sitting on strong support and ripe for a re-initiation of its rally in the coming year as portfolio managers and traders look for companies with superior cash flow and a dominant position in the market that are expanding internationally and executing well in the bottom line.
So, stay on board Campbell Soup for the long run.

Recommendation: Buy Campbell Soup Co (NYSE: CPB) at market (**).

(**) - Special Note of Disclosure: Horacio Marquez holds no interest Campbell Soup Co.

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