Campbell Soup Company (NYSE: CPB) fell more than 6.5% following its Q3 report for no good reason. The company’s results were better than expected, and the guidance was reaffirmed and might be considered cautious. The news was no catalyst for the rally but also not a spark to send investors running for the hills. Campbell’s business isn’t in danger, the company continues to show pricing power, and the capital returns are safe, which makes the pullback an opportunity to buy at the cheapest levels in 8 months.
Campbell Soup Company Has Solid Quarter
The primary issue with the Campbell Soup Company Q3 report is that it is barely better than as expected, and the guidance is no better. The market craves better-than-expected results, which makes it hard for many companies to live up to expectations, and stock prices are affected by the news. In this case, Campbell Soup Company issued a mixed report following several quarters of outperformance which is a weak report in the eyes of the market.
The revenue of $2.23 is up 5% compared to last year, but that doesn’t matter because the growth was already priced into the market. The gains are driven by pricing power; average prices are up 14.5% and offset by slight declines in volume and mix.
The margin news is equally tepid. The gross margins contracted, and the operating expenses increased less than expected. The net result is adjusted EPS of $0.68, down $0.02 compared to last year, but $0.03 better than expected. This should have led to an increase in the guidance, but it didn’t, which is the primary cause of the share price meltdown.
The company reaffirmed its prior guidance for FY growth of 8.5% to 9.5%, which is good news but not a catalyst, given the analysts were expecting just a hair more. However, the company CEO says results are tracking toward the high end of the EPS range, so there is a chance the guidance is weak.
Capital Returns Are MMM MMM Good
Regardless of the growth outlook, the cash flow and balance sheet are robust, making the capital return program safe and reliable. The company generated $918 million of cash flow in the quarter and used only $477 to pay dividends and buy back shares. The buybacks are worth $141 million, and there is $404 million left under the current authorization. That’s worth 2.65% of the market cap with shares at the new low and will help support the market over the next few quarters.
The dividend is worth nearly 3.0%, with shares near $47. That’s at the high end of the CPB range, and the distribution may grow in the coming year. The company has a history of growth if not one of consecutive annual increases, and there is room in the numbers. As it is, trading at 16X earnings and yielding 3.0% is among the sector's better yield-to-value combinations.
The analyst rate the stock at Hold and have been supportive this year. If that changes now, the stock could continue lower. Until then, the consensus price target is about 10% above the price action and has been trending higher.
The Technical Outlook: Campbell Soup Company Seeks Support
The price action in CPB fell more than 6.5% but may already be at the bottom. The market fell to a support zone near $47 that could hold the market up. If not, the stock could fall to the $45 level or lower, presenting a deeper value and yielding better.
