In yesterday's e-mail, I took a first look at consumer-products giant Clorox (CLX). Its beaten-down shares are trading near a 12-year low and at 15.6 times forward earnings. So I concluded that the stock isn't cheap enough to be compelling, in light of the company's rising debt and rapidly declining free cash flow ("FCF").
Today, I'd like to take a first look at another iconic American consumer company that could be an interesting idea – Campbell's (CPB)...
The company has been around since 1869 and makes dozens of brands that fill every home: Campbell's soup, Swanson frozen TV dinners, Prego pasta sauce, Pace Mexican salsa, Pepperidge Farm cookies, Goldfish crackers, Snyder's of Hanover pretzels, Cape Cod and Kettle potato chips, V8 beverages, and more.
Despite owning so many iconic names, the stock has been a disaster. It's down roughly 60% in less than two years. And it hit a 32-year low yesterday, as you can see in this chart:
I've only seen stock charts like this from companies in severe distress. However, Campbell's financials actually paint a stable picture...
Branded food products are a good business with high margins – albeit under pressure from private-label brands, fresh foods, and GLP-1 weight-loss drugs.
Campbell's gross margin has declined from 40% to 30% over the past two decades. But it has found ways to cut costs, so its operating margin has only declined from 16.2% to 13.3% in the same time frame:
Despite spending more than $12 billion on acquisitions over the past two decades, Campbell's has failed to grow much at all...
As you can see in the chart below, trailing-12-month ("TTM") revenue and operating income are only slightly above 2007 levels:
FCF tells a similar story – it has been relatively flat for 18 years. That said, it's extremely stable and actually rose during the global financial crisis and the COVID-19 pandemic:
Turning to capital allocation, the most noteworthy item is the company's rock-solid dividend. It paid out $469 million to shareholders in the past 12 months. At today's beaten-down stock price, that translates to a 7.8% yield.
Importantly, the company's $692 million in FCF easily covers its dividend. So, unlike Clorox, I see little risk that Campbell's will need to cut it.
Campbell's has also made a number of acquisitions, totaling more than $12 billion. The largest was $6.1 billion for the 2018 purchase of Snyder's-Lance, which owns Snyder's of Hanover pretzels, Cape Cod and Kettle potato chips, and Pop Secret popcorn.
And in 2024, Campbell's paid $2.7 billion for Sovos Brands, which owns Rao's Homemade items, Michael Angelo's frozen entrees, Noosa Yoghurt, and Birch Benders products.
It's not a good sign that Campbell's revenues, profits, and FCF are essentially flat over two decades after spending so much on acquisitions:
The company's net debt is what one would expect. It goes up when it makes acquisitions and declines in subsequent years as Campbell's uses its excess FCF (above and beyond the dividend) to pay down debt:
In summary, Campbell's reminds me a lot of Clorox: an iconic company with well-known brands that generates a lot of FCF and pays a high dividend, but is struggling to grow, especially given how much it has spent on acquisitions.
However, Campbell's is paying a much higher dividend: 7.8% versus Clorox's 5.3%. And critically, its FCF is stable and easily covers its dividend, unlike Clorox.
Lastly, its shares are much cheaper. As you can see in the chart below going back nearly three decades, Campbell's stock has, on average, traded at 16.4 times forward price to earnings (P/E). And it has never traded anywhere close to its current level of 9.1 times, even during the depths of the global financial crisis:
At its current P/E multiple, the market is pricing Campbell's as if it's a rapidly melting ice cube that will need to slash its dividend – a classic value trap.
However, the financials tell a different story – of a slowly declining cash cow that's paying out huge amounts of FCF.
The rising adoption of GLP-1 drugs has been and will continue be a headwind for all makers of snacks and processed foods. But this appears to be more than built into Campbell's current valuation.
If you're shocked, even disgusted, by a market in which investors are falling over themselves to pay 34 times revenues for market-share-losing OpenAI... or 100 times revenues for Elon Musk's money-losing space company... Campbell's might be just the antidote.
My team and I are going to do a deeper dive on Campbell's. If we decide it's time to buy the stock, as always, Stansberry's Investment Advisory subscribers will be the first to know. You can become one by clicking here.
Best regards,
Whitney
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P.P.S. The stock market and our offices will be closed on Monday for Memorial Day. Look for my next daily e-mail in your inbox on Tuesday, May 26. Enjoy the holiday!