We have currently downgraded our long-term recommendation on Campbell Soup Company (CPB) to Underperform from Neutral.
Campbell is consistently losing its share in the soup category due to the company's recent price hike actions in this category. Competitors have not yet followed Campbell's price hike action. Consequently, price gap with other players has widened and hence store brand market share is speeding up in both condensed and ready-to-serve segments.
Moreover, demand for canned soup is more likely to remain stagnant in the near future. Market share losses and stagnant canned soup demand may undermine Campbell’s future operating performance.
Moreover, despite a healthy top- and bottom-line performance during fourth-quarter 2011, Campbell is anticipating a decline in the adjusted earnings per share in fiscal 2012, primarily due to increasing input costs, declining market share in its soup category and costs associated with innovation and brand building.
The company anticipates a decline in adjusted earnings in the range of 5% to 7% from the adjusted base of $2.54 per share in fiscal 2011. As per the company’s guidance, adjusted EBIT may decline in between 7% and 9% compared with its previous fiscal. However, net sales may grow in the range of 0% to 2% in fiscal 2012.
Further, the raw and packaging materials used in the company's business include tomato paste, grains, beef, poultry, vegetables, steel, glass, paper and resin. Many of these materials are subject to price fluctuations due to a number of factors. Besides, rising commodity prices may undermine the company’s future performance.
Additionally, due to its exposure in international market, Campbell Soup remains prone to currency fluctuations. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside the U.S. An increase in menu price may have a direct impact on consumer demand.
Above all, Campbell Soup operates in a highly competitive food industry and experiences worldwide competition in all of its principal products from such well-established rivals as General Mills Inc. (GIS) and H. J. Heinz Co. (HNZ). This may dent the company's performance.
Currently, Campbell Soup has a Zacks #3 Rank, implying a short-term Hold rating on the stock.
CAMPBELL SOUP (CPB): Free Stock Analysis Report
GENL MILLS (GIS): Free Stock Analysis Report
HEINZ (HJ) CO (HNZ): Free Stock Analysis Report
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