Buy, Sell or Hold: Campbell Soup Co. (NYSE: CPB) Looks to Profit From its Recent Overseas Expansion

Campbell Soup Co. (NYSE: CPB) traces its origins back to 1869.  This company has been around forever, and it has used its time well. 

Campbell Soup has survived and thrived through the Great Depression of the 1930s, both World Wars, and every single one of the challenges and setbacks that the U.S. economy has suffered since.  The magnitude of this accomplishment is almost unthinkable.

I have been following Campbell Soup for almost a decade, mainly as a fixed-income play.  Its reliable earnings and very strong cashflow allow it to pay a very attractive 3.6% dividend, which is very secure, given that it represents just 30% of the company's earnings. 

Also, this "Old Faithfull-like" revenue stream that grows steadily over time allows Campbell to repurchase stock recurrently, boosting earnings per share.  And the  company's undisputed dominance in soups and its strong positioning in other products - like Swanson broth and canned poultry, V8 vegetable juices, Chunky chili, Prego and Pace sauces - command almost 25% operating margins, which lead all its peers, including superb competitors like General Mills Inc. (NYSE: GIS), Kellogg Co. (NYSE: K) and H.J. Heinz Co. (NYSE: HNZ)

The only place Campbell Soup has been lacking is in its growth, but that is about to change.
On May 26, Campbell Soup announced it the signing of a distribution agreement with the largest consumer staples distributor in Russia and Eastern Europe: Coca Cola Hellenic.

Coca Cola Hellenic, which is currently distributing in the Moscow region for Campbell Soup, will enlarge distribution to more than 100 cities and twelve regions across Russia, beginning in August. 

The immensity of this step cannot be missed as the company clearly points out:

"Soup consumption in Russia is more than double that of the United States, where U.S. consumers eat approximately 14 billion soup servings per year. In Russia, nearly 32 billion servings are consumed each year, or approximately 230 servings per capita, which are still predominately homemade, making Russia the world's second largest soup consuming market after China."

This comes less than two years after the simultaneous entry of Campbell Soup in both China and Russia.  Since most of those markets are homemade soups, the convenience, high quality, and health-oriented focus of Campbell Soup products will offer the Russian and Chinese consumers a very compelling value proposition. 

We can only speculate about the effects that similar efforts to expand in China, which the company must surely be working on, will have.  It won't be long before these foreign forays make an impact on growth and margins, and thus the company's stock price.

Remember that in emerging markets, consumer staples companies enjoy growing populations, growing real income per capita, and an under-served market for Campbell Soup's products.  It is a profit growth playground.  In addition, the longer winters in much of Russia and in Northern China will decrease the typical seasonality of Campbell Soups sales, only 30% of which are international today.

The stock suffered over the past year, tumbling from its peak of $42.45 share to a recent low of about $25, which is a strong support going back to the 2002-2003 recession and even the year 2000.  The fundamental valuation of the stock is in line with peers, considering the very meager growth assumptions for the industry.  This is where the surprise lies and the catalyst for earnings surprises starting in the second half of the calendar year.

The long term technicals also show the stock oversold and have just turned to the upside, indicating a medium term upside potential to at least $32 a share, a 19% gain excluding solid dividends of 3.7%. 

The company reported last week that its third-quarter profit fell sharply from last year, when it sold its Godiva Chocolatier brand, but its adjusted profit rose 3.6%. Excluding one-time items such as the sale of Godiva, the nation's largest soup maker earned $171 million in this year's third quarter, or 48 cents a share, up from $165 million, or 43 cents per share a year ago.

The company also said the strong dollar pushed its results down 4 cents per share. But the dollar rally that lasted for most of that quarter is gone and so were most of the high commodity prices.  In addition, Campbell Soup, given its superb brand loyalty has what most companies envy: pricing power.

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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