Recent Buy - Campbell Soup Co (CPB)

Alright folks, what does one do when an equity holding of theirs falls by > 20% in a matter of days despite maintaining a high conviction of the company's ability to overcome short terms headwinds? Buy more of course!  Well, that is just what I have done.  Today I increased my position in CPB by 50%.  The company's current valuation is ridiculously low based on adj EPS and/or operating cash flow, especially in light of where many of the indexes are currently trading.  Below are the details of the purchase as well as some additional commentary regarding recent events for CPB.

Purchased: 30 shares x $33.649 = $1,009.47 (+$0 commission).  This brings my total share count to 90 with this latest purchase.




Dividend Income: $42.00 ($1.40/sh annually; paid quarterly in Jan, Apr, Jul, and Oct)

Forward P/E vs. S&P Forward P/E: 11.7 (based on revised guidance outlined below) vs. S&P 17.3

Debt to capital < 50%: No, 60.0%

Interest coverage ratio of at least 3:1: Yes, 12.5x

S&P and/or Moody's credit rating of BBB+/Baa1 or better: No, BBB

Current dividend yield > 1.5x S&P yield: Yes, 4.16% vs. S&P 1.91%

Payout ratio < 60% (or <85% for utilities): Yes, 48%

Dividend King or CCC classification: No

Commentary: 

     CPB recently announced their Q3 2018 earnings concurrently with the announcement of their CEOs immediate retirement and CEO transition plan.  The CEO's retirement was abrupt and unexpected and was likely the result of the company's poor performance as of late.  What is also worth noting here is that the company is still +50% collectively owned by Dorrance family, descendants of the company's founder, John T. Dorrance.  As such, it is no surprise to see that descendants of this founder hold 3 of the 12 board seats of CPB.  Given these facts, for better or worse, you likely won't see any activists targeting this company.

     As noted in their recent earnings release, the company recorded an impairment charge of $619M related to the Campbell Fresh Segment which resulted in a quarterly loss of $475M.  This was likely the leading factor driving the recent CEOs rather early retirement/departure.  Net Sales Increased 15 Percent Reflecting Impact of Recently Completed Acquisition of Snyder’s-Lance; Organic Sales Comparable to Prior Year Earnings Per Share (EPS) Loss of $1.31; Adjusted EPS Increased 19% to $0.70.  Obviously the company's leadership is not happy with the results of the quarter and YTD performance and neither are investors.

    Looking at Cash Flow from Operations for the 9 months ending March 2018, the balance is $1.0B, which is just a hair above the same 9 months from last year.  Now if I add an estimate of $0.2B operating cash flow for Q4 2018 to the YTD balance of $1.0B for an estimated 2018 Operating cash flow of $1.2B and compare that to the current market cap of CPB at $10.1B, you can see that the company is trading at only 8.4x cash flow, which is incredibly cheap IMO.  

     If the company can turn things around, grow sales, and improve operating discipline/efficiency we will see the company's valuation quickly climb to recent highs of the last year; it will just be a matter of how quickly it can do so.  And, if Wall Street lags in recognizing the value of CPB once operations improve, I would love to see the board approve a large share buyback announced while also deploying some cash to reduce debt and improve their credit rating.

Management's revised 2018 guidance is noted below: