Buy, Sell or Hold: Even After a Near-30% Gain Campbell Soup Co. (NYSE: CPB) Still Has Room to Run

I first recommended Campbell Soup Co. (NYSE: CPB) on June 1, 2009. At the time of our recommendation, our price target was a minimum of $32. The stock is now trading just above $35 today - a 27% increase.

What's more is that Campbell, which boasts a strong brand and above-average international sales potential, is poised to keep its winning streak intact.

The market sometimes offers us compelling propositions, like it did last year, when the stock inexplicably sold off. We took ready advantage of the situation. Campbell Soup has a very large, stable and increasing cashflow. It is so stable that it is almost boring. In fact, this company's stability qualifies it more as a dividend play than anything else.

In the two consecutive quarters following our initial recommendation, Campbell Soup torched estimates, as analysts on Wall Street had not caught on to our emerging markets growth story. The Street caught on in the last quarter but still has not fully recognized this company's potential.

But to be on the safe side, lets review the investment proposition then and see if anything has changed.

The bottom line is that Campbell Soup enjoys a huge and very stable cashflow. This monster cashflow is the product of the company's unquestioned dominance of the U.S. soup market, and increasingly, its emerging market profits. The company's nearest U.S. competitor sells one-seventh of what Campbell sells. This profitability generates operating margins of some 25% -- twice that of other consumer staple companies. And the high certainty regarding Campbell's cashflow lets it carry a high level of leverage that brings their return on equity to an astounding 72%!

The end result of Campbell Soup's soup market dominance and profitable execution is a 3.1% dividend yield. And that dividend is very safe, since it represents less than half the company's profits. It also compares very favorably with the less than 3% yield that you'd get on 10-year U.S. Treasuries. And while Campbell Soup can lift its prices in accordance with inflation, investors lose money on U.S. Treasuries if inflation increases and yields move up.

Campbell Soup also offers a huge upside based on its strong emerging market growth.

Additionally, the demand for soup could actually grow faster in an economic downturn, because consumers switch to cheaper foodstuffs to save money. That means we are covered on the economic downside, guarded against inflation and getting higher yield than we would sitting on 10-year Treasuries. And that's in addition to the huge upside presented by growth in emerging markets - specifically Russia and China, which respectively are the largest and second-largest soup markets in the world.

Russia's market is basically wide open for Campbell Soup's products, because most of that country's citizens make their own soups from raw meats and vegetables. But ready-made soups are cheaper and more convenient, which means the product is destined to find a mass following.

Meanwhile, Campbell keeps executing well in cost controls, and its marketing programs - with superior market segmentation and product positioning - have allowed for growth with fewer promotions. This has resulted in expanded margins, which together with the emerging market expansion keeps leading to continued positive earnings surprises.

So if you don't consider consumer staples growth candidates, think again.

Remember, Warren Buffet has made a fortune on another "boring" consumer staple company that seemed to be maxed out in the United States: The Coca-Cola Co. (NYSE: KO). While the entire analyst community was asleep at the wheel, Warren saw the compelling long-term value of replicating the company's success in hundreds of countries around the world. So he took a long-term position in the stock.

That's exactly what we're aiming to do with Campbell Soup.

While analysts look at the U.S. market's minor developments, not understanding the growth dynamics of exotic countries that they have seldom analyzed and never visited, we will take advantage by remaining constructive on Campbell Soup - even as it approaches most analysts' price targets of around $35 to $37 a share.

The stock is still trading at a discount to the Standard & Poor's 500 Index when the reliability of its earnings should command a premium. Also, on a technical basis, the stock is on a bullish trend and at the bottom of the Bollinger bands. Like the market, it is oversold right now, and sitting on strong support.

This is a short-term entry opportunity for any short-term traders. Finally, we reiterate the highly defensive nature of Campbell Soup's stock and its strong and reliable dividend yield, which compares favorably with 10-year Treasuries. On the basis of continued growth and expanding margins, I am moving my target up to the pre-crash, 2008 high of $40 a share

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

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

[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big - a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities being created by the possible broadband breakdown - a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]

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