Investors need to tread with caution while buying stocks and dumping the ones that are not performing well. On that note, we advise investors to pull the plug on Campbell Soup Company CPB that has tanked close to 22% this year, underperforming the Zacks Food – Miscellaneous industry’s decline of 6.7%.
The Zacks Rank #5 (Strong Sell) stock’s dismal run can be blamed on multiple hurdles such as a drab sales surprise history, softness in U.S. Soup category and input cost inflation. These headwinds lingered in fourth-quarter 2018 and compelled management to be cautious while issuing the fiscal 2019 guidance.
Campbell Soup: Not So Appetizing
Campbell has posted negative sales surprise in six of the past seven quarters, including the fourth quarter of fiscal 2018. During the quarter, the company’s Americas Simple Meals and Beverages unit witnessed a 6% drop in organic sales, mainly due to softness in U.S. Soup and Canadian sales. Excluding gains from the Pacific Foods buyout, U.S. Soup sales tumbled 14% on account of lower sales of condensed soups, broth and ready-to-serve soups. Intense competition and reduced promotional activities also played a role. Though the company is making concerted efforts to improve trends in the U.S. Soup business, sales are likely to continue the freefall in fiscal 2019. Apart from this, management expects Campbell Fresh sales to be hurt by the termination of two key private-label refrigerated soup deals.
Campbell’s strained margin performance also makes it unappetizing investment pick. During the fourth quarter, adjusted gross margin contracted 5.6 percentage points to 30.6% due to cost inflation, escalated supply-chain expenses, adverse mix, increased promotional spending, impact of the recent buyouts and recall of flavor-blasted Goldfish crackers. The cost inflation stemmed from increased prices of dairy, steel cans, meat and resins along with higher-than-expected rise in transportation and logistics expenses. Gross margin softness and higher adjusted marketing and selling expenses also weighed on Campbell’s operating margin.
Unfortunately, management expects fiscal 2019 gross margin to decline nearly 2 percentage points on account of cost inflation and unfavorable mix related to the acquired businesses. Notably, management expects cost inflation to remain high and range between 4% and 5% owing to the aforementioned drivers along with tariff impact. These factors, along with expectations of higher interest expense (related to recent buyouts), pose threat to the bottom line. Also, Campbell expects its first-quarter performance to be particularly marred by factors like adoption of new revenue accounting standard, effects of product Goldfish recall and weakness in U.S. Soup business.
Clearly, these factors have made analysts hesitant about Campbell, as the Zacks Consensus Estimate for the first quarter and fiscal 2019 have trended downward over the past 30 days.
Delicacies in the Food Space
Along with Campbell Soup, many other food players are bearing the brunt of input cost inflation. In fact, escalated freight expenses, supply-chain bottlenecks and competition have been a drag on profits for most companies in the food space — which is in the bottom 9% out of all Zacks industries.
Nevertheless, there’s always some light at the end of the tunnel. Likewise, there are some solid food players, which have bucked the industry trend with their solid pricing initiatives, focus on innovation, product launches and diversification. Also, benefits from acquisitions, divestitures and alliances have been generating encouraging results. Additionally, many food companies are gaining from efforts to augment organic and natural offerings in response to rising health consciousness. To top these, stringent cost-containment efforts and efficient productivity programs are helping a host of food players stand out.
That said, the Food – Miscellaneous industry definitely has some bright spots for investors to park their funds in. In fact, we have highlighted three stocks, which have defied the industry trend on the back of well-chalked growth methods. Markedly, these stocks carry a favorable Zacks Rank, flaunt an impressive record of earnings surprises and also possess a striking long-term growth rate.
3 Food Stocks to Satiate Investors’ Appetite
Medifast, Inc. MED is undoubtedly a solid bet. This Zacks Rank #1 (Strong Buy) stock has grown more than one and a half times year to date, courtesy of its superb earnings surprise history. Notably, the Baltimore-based company has outperformed the Zacks Consensus Estimate in all of the trailing four quarters, the average beat being 16.6%. Also, the company’s robust potential is reflected in its strong estimate revisions in the past 60 days as well as long-term growth rate of 20%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
McCormick & Company, Incorporated MKC is another promising pick. Carrying a Zacks Rank #2 (Buy), the Maryland-based company’s shares have gained 27% so far this year. McCormick, which has delivered a positive earnings surprise of 6.9% in the past four quarters, has been gaining from dedicated focus on buyouts, product innovations, cost-containment measures and efficient marketing initiatives. Notably, this leading manufacturer and distributor of spices and seasonings carries a long-term growth rate of 9%.
Investors can also count on The Chefs' Warehouse, Inc. CHEF. The Connecticut-based company’s earnings estimate for the current year has risen by a notch to 78 cents in the past seven days. Also, this Zacks Rank #2 company has seen its shares rally as much as 80.2% this year. Notably, Chefs' Warehouse carries a long-term growth rate of 22% and its earnings beat the Zacks Consensus Estimate by an average of 57.2% in the trailing four quarters — with a beat each time.
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