High inflation, the ongoing geopolitical issues, and the extended COVID-19 lockdowns in China have been weighing heavily on investor sentiment lately. Rising energy prices, transportation costs, and supply chain disruptions have been pushing food prices higher. However, the stable demand for packaged food products should allow companies in this space to pass on rising input costs to the customers. Also, rapid digitalization of operations and new product launches should drive the industry’s growth.
Investor interest in this consumer defensive industry is evident from the First Trust Nasdaq Food & Beverage ETF’s (FTXG) 4.6% gains over the past three months versus the SPDR S&P 500 Trust ETF’s (SPY) 6.6% loss. The global packaged food market is expected to grow at a 6.3% CAGR to $4.26 trillion by 2026.
Kraft Heinz Co. (KHC) and Campbell Soup Company (CPB) are two prominent players in the packaged foods industry. KHC manufactures and markets food and beverage products internationally, including condiments and sauces, cheese and dairy products, meals, meats, refreshment beverages, coffee, and other grocery products. It sells its products through its own sales organizations, independent brokers, agents, distributors, e-commerce platforms, and retailers. CPB manufactures and markets branded convenience food products, including soups and sauces, biscuits and confectionery, and foodservice through its Meals and Beverages and Snacks segments. It sells its products through retail food chains, mass discounters and merchandisers, club stores, convenience stores, drug stores, dollar stores, e-commerce, and independent contractor distributors.
Year-to-date KHC has gained 8.6% and CPB has risen 6.4%. Which of these stocks is a better pick now? Let’s find out.
Recent Financial Results
KHC’s net sales for its fiscal 2022 first quarter ended March 26, 2022, decreased 5.5% year-over-year to $6.05 billion. The company’s gross profit came in at $1.93 billion, down 12.3% from the prior-year period. Its operating income came in at $1.12 billion, indicating a 2.4% year-over-year improvement. While its net income increased 37.5% year-over-year to $781 million, its adjusted EPS fell 16.7% to $0.60. As of March 26, 2022, the company had $2.98 billion in cash and cash equivalents.
KHC will pay a $0.40 quarterly cash dividend on June 24, 2022. The stock pays a $1.60 per share dividend annually, translating to a 3.63% yield. The company’s dividend has declined at an 11.5% rate over the past five years.
For its fiscal year 2022 second quarter ended January 30, 2022, CPB’s total net sales decreased 3.1% year-over-year to $2.21 billion. The company’s adjusted gross profit came in at $671 million, down 12.9% from the year-ago period. Its adjusted EBIT came in at $318 million, representing a 16.8% decline from the prior-year period. CPB’s adjusted net income decreased 16.5% year-over-year to $208 million. Its adjusted EPS came in at $0.69, representing a 15.9% year-over-year decline. As of January 30, 2022, the company had $357 million in cash and cash equivalents.
CPB paid a $0.37 quarterly cash dividend on May 2, 2022. The stock pays a $1.48 per share dividend annually, translating to a 2.92% yield. The company’s dividend has grown at a 1.68% rate over the past five years.
Past and Expected Financial Performance
Over the past three years, KHC’s revenue and EBITDA have decreased at CAGRs of 0.3% and 4.2%, respectively.
KHC’s EPS is expected to decrease 8.2% year-over-year in fiscal 2022, ending December 31, 2022, and rise 3.7% in fiscal 2023. Its revenue is expected to fall 1.6% in fiscal 2022 and rise 0.3% in fiscal 2023. Analysts expect the company’s EPS to fall at a 1.6% rate per annum over the next five years.
Over the past three years, CPB’s EBITDA and EPS have increased at CAGRs of 5.2% and 1.7%, respectively.
Analysts expect CPB’s EPS to decline 6.7% year-over-year in fiscal 2022, ending July 31, 2022, and increase 3.2% in fiscal 2023. Its revenue is expected to decline 0.8% year-over-year in fiscal 2022 and rise 1.6% in fiscal 2023. Analysts expect the company’s EPS to grow at a 0.8% rate per annum over the next five years.
Valuation
In terms of trailing-12-month Price/Sales, KHC is currently trading at 2.10x, 13.5% higher than CPB’s 1.85x. In terms of forward EV/Sales, CPB’s 2.39x compares with KHC’s 2.87x.
Profitability
KHC’s trailing-12-month revenue is almost 3.1 times CPB’s. However, CPB is more profitable, with an 11.1% net income margin versus KHC’s 4.8%.
Furthermore, CPB’s ROE, ROA, and ROTC of 29.5%, 7.1%, and 9.8% compare with KHC’s 2.5%, 3.4%, and 4.4%, respectively.
POWR Ratings
While CPB has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, KHC has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both KHC and CPB have been graded a C for Value, in sync with their slightly higher-than-industry valuation ratios. CPB’s 2.39x forward EV/Sales is 33.2% higher than the 1.80x industry average. KHC has a 2.87x forward EV/Sales, 59.7% higher than the 1.80x industry average.
CPB has a B grade for Quality, consistent with its higher-than-industry profitability ratios. CPB’s 11.1% trailing-12-month net income margin is 108.6% higher than the 5.3% industry average. KHC’s C grade for Quality is in sync with its lower-than-industry profitability ratios. KHC has a 4.8% trailing-12-month net income margin, which is 10.3% lower than the 5.3% industry average.
Of the 87 stocks in the B-rated Food Makers industry, CPB is ranked #26, while KHC is ranked #42.
Beyond what we have stated above, our POWR Ratings system has graded CPB and KHC for Sentiment, Growth, Stability, and Momentum. Get all CPB ratings here. Also, click here to see the additional POWR Ratings for KHC.
The Winner
Strong demand for packaged food products despite rising food prices should allow KHC and CPB to stay afloat amid these uncertain times. However, relatively lower valuation and higher profitability make CPB a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Food Makers industry.
KHC shares were trading at $39.01 per share on Wednesday afternoon, down $4.15 (-9.62%). Year-to-date, KHC has gained 9.81%, versus a -17.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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