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Campbell Soup Is Hot Because Stability Is the New Growth

Campbell Soup (ticker: CPB) closed up 10% on Wednesday after the company reported better-than-expected earnings per share.

Campbell earned 77 cents per share in its fiscal-year 2019 second quarter. Analysts predicted the company would earn 71 cents per share.

The stock has had a rough go of it lately, losing 2.6% annually for the past five years. That performance prompted activist investor Dan Loeb to get involved last year—a surprise to some analysts since Campbell is still controlled by family shareholders.

Loeb was successful in making board changes and getting a new CEO appointed. It’s too early to call the Campbell turnaround a success, but its stable results are enough to satisfy investors today.

The back story. After weak results from companies like Anheuser-Busch InBev (BUD) and Kraft Heinz (KHC), investors are very wary of highly indebted food companies.

Campbell purchased Snyder’s-Lance last year for $6 billion, leaving it with over $9 billion in debt. Early results from the combined companies disappointed investors, and Campbell’s stock cratered 12% in May after management reported falling sales.

What’s new. The weak performance led to an activist-engineered shake-up in the boardroom and the C-suite. Mark Clouse was named CEO in January. He had earlier ran Pinnacle Foods, which was sold to Conagra Brands (CAG) last year. Campbell’s soup responded with comment and pointed out that former CEO Denise Morrison retired before Third Point started its proxy fight. Third Point, however, did have a hand in selecting Mr. Clouse, the new CEO.

For the quarter Campbell just reported, comparable sales were flat. Not great, but better than shrinkage. Importantly, there was no change to the dividend. Campbell shares yield over 4%.

Looking ahead. On its conference call with analysts and investors Wednesday morning, management said it was focusing on cost reduction. But margins haven’t improved yet because the company is investing in “the trade”—that is, spending more marketing dollars with retailers in an attempt to boost sales.

If successful, that will yield sales growth in Campbell’s struggling food categories. That would cheer investors and help the stock’s valuation multiple expand. Shares trade for 13.4 times estimated 2019 earnings—nearly a 25% discount to their historical average.

Campbell stock closed up 10% at $34.96 Wednesday.

This post was updated to include a comment from Campbell and the closing price of its stock.

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