Campbell Soup Company

Moat: 2/5

Understandability: 1/5

Balance Sheet Health: 3/5

Campbell Soup Company is a multinational food company, primarily known for its iconic soups but also produces snacks, meals, and sauces.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

  • Revenue Distribution: CPB operates through two segments: Meals & Beverages, and Snacks. The Meals & Beverages segment primarily produces and markets soups, sauces, and meals under brands such as Campbell’s, Pace, and Prego. The Snacks segment is composed of cookies, crackers, and other baked goods, including brands such as Goldfish, Pepperidge Farm, and Milano.
  • Industry Trends: The consumer-packaged goods industry is characterized by intense competition, with a few large players vying for market share, which results in pricing pressure. Consumer tastes and preferences are also changing rapidly. Health and wellness trends push consumers toward more nutritious alternatives, while preferences towards snacking create demand for new product innovation in the snacks industry. Economic uncertainty is also increasing price sensitivity, further intensifying competition. The cost of raw materials, packaging, and labor can fluctuate substantially.
  • Margins: The company’s gross profit margin has been relatively stable in the last three years, with some positive movements in operating margin in 2021 and 2022, and a decrease in 2023. It shows a company with some pricing power (due to brands), which does not rely on high cost advantages or efficiency, and thus has good margins.
  • Competitive Landscape: CPB faces stiff competition from large food conglomerates such as Kraft Heinz, Nestle, General Mills, and private label producers. Retailers are increasingly selling products directly to consumers (store brand), making competition tougher. There is also considerable brand awareness and loyalty, such that it is hard for competitors to gain market share quickly.
  • What Makes CPB Different: CPB has a portfolio of well-established iconic brands, especially in soups, that are hard to replicate. The company’s scale and distribution system, particularly in North America, allow it to distribute these products to a large market at lower costs and quickly, providing some level of edge. It also has built a significant market share in particular segments such as the soup category. In particular, their brand is its edge (as it sells similar soup to its competitors, while at a higher price).

Financials Analysis:

  • Income Statement Analysis: While sales have been pretty consistent the past 3 years, net earnings is declining. We also need to keep in mind the cost of sales, which is currently the largest expense for the company.
  • Balance Sheet Analysis: CPB has a decent amount of total assets (12.9 billions in 2022) and a debt to equity ratio of just under 1, which is not too risky, but it has a growing liabilities component (with 2 billions more than assets in current period). The cash position is relatively low, and goodwill and intangibles make up the biggest component of assets, meaning they paid high amounts for acquisitions.
  • Cash Flow Analysis: CPB generates significant cash flow from operations. This suggests good financial health and sustainability. However, most of this cash is being used to finance investing activities and pay for debts. This implies that the company has limited amounts of cash to use for growth or other activities.
  • Recent Earnings: The company has been experiencing lower margins in the snacks business, which is impacting the overall earnings. Higher costs are squeezing the company’s margins, especially when they cannot fully pass on the prices to consumers. They have also been focused on cutting supply chain costs, as it is currently the largest cost component. They are also looking to improve marketing productivity. Management is focused on margin expansion and operational efficiency.

Risks to the Moat and Business Resilience:

  1. Changing consumer preferences: Health and wellness trends are shifting consumer tastes away from processed foods towards natural foods. If CPB fails to adapt quickly enough to these trends, its brand and other advantages could become less relevant.
  2. Competition from private labels and other brands: The increasing popularity of private label brands gives retailers more negotiating power and poses a threat to margins. It is also getting harder for CPB to compete, because of the high competition in the snack and food market, making them to spend more on marketing to retain existing customers and acquire new customers.
  3. Technological disruption: E-commerce may change the dynamics of food distribution, further increasing competition. There are a lot of companies focused on alternative methods of distribution, so they are eating the edge from larger companies, as they are using technology to cut overhead and expenses.
  4. Supply chain disruptions and input price volatility: The rising costs of raw materials, packaging, and labor affect the profitability and value of the company, as they may not be fully passed to consumers.
  5. Brand Deterioration: Although Campbell’s brands are iconic, they are still susceptible to changes in consumer perception, especially as preferences evolve. If there is mismanagement of the products or brand, it can result in a loss of brand value.

Moat Rating Justification: CPB is given a narrow moat rating with the justification that it’s major moat comes from its brand power, while other moats are relatively weaker (and their brand moat can be challenged). Although it benefits from scale and has a distribution system, it doesn’t offer much more differentiation. While there are many iconic brands, it is not really a moat as consumer’s can still choose alternative brands from other companies with ease. This also implies that the pricing power of CPB is not very high. Moreover, the consumer packaged goods sector is very competitive with intense rivalry.

Understandability Justification: The company’s product lines and the industry are easy to understand, but there is still some complexities present. It is a very competitive sector and management is very complex, therefore not that easy to understand.

Balance Sheet Health Justification: Although the company’s liabilities have grown in the past years, they are still in a manageable position. However, more scrutiny is needed on the increase of their liabilities. Goodwill and intangibles is a significant amount, therefore, a higher percentage of assets are illiquid. It has great FCF, but this is not really affecting their cash position, as it has gone to fund investing activities. They are also not a company with a zero debt, and they are highly leveraged, making their health questionable.