Campbell Soup Company (NYSE: CPB) fell from grace last year as tough comps to the prior year, and retreating sentiment led the market to lower price points. However, the bottom is in for this stock, and higher prices are coming. The Q2 results were not robust but were enough to catalyze the market; shares are up significantly following the release and point to firming sentiment due to improving profitability, capital returns, and growing shareholder equity. Trading at only 14X earnings and yielding nearly 3.5%, CPB stock is a solid play in Consumer Staples for income investors this year. 

Campbell Soup Outperforms; Gives Cautious Guidance

Campbell Soup Company did not have a robust quarter. Still, the details are favorable because they show market normalization, improved profitability, and precede a pivot back to growth that will occur in the 2nd half. The $2.46 billion in net revenue is down 0.8% compared to last year on a 1% decline in organic business but outpaced the consensus, and contraction narrowed. 

Outperformance is slim but present and compounded by margin, which is the brightest spot in the report. Also, the 0.8% contraction is a small give-back compared to the 13% growth posted last year. On a two-year basis, sales are up 13%. Segmentally, Meals & Beverages are down 2%, with Snack sales flat or up 1% when adjusted for the divestiture of Emerald Nuts. 

The margin is where the results shine. The company widened its gross margin by 110 basis points GAAP and 70 adjusted on improving costs, lower freight, and cost-cutting initiatives. The net result is a 1% increase in EBIT and flat adjusted EPS. The $0.80 adjusted EPS is equal to last year’s take, aided by margin strength and share repurchases expected to continue in 2024. Repurchases are not robust, but the remaining authorization includes dilution-fighting and value-building amounts equal to nearly 3% of the post-release market cap. 

Campbell Soup on Track to Build Shareholder Value

Campbell Soup isn’t expected to thrive this year, but the guidance calls for up to 1.5% growth and is cautious. The company is set to close on acquiring Sovos Brands this quarter, adding 13% of annualized revenue growth in one fell swoop while opening the door to additional margin improvement and long-term growth opportunities. Additionally, the company set a cautious tone, saying there is a possible upside to the guidance should the consumer rebound accelerate in the 2nd half.  

The takeaway is that cash flow is solid and supports a healthy capital return program, balance sheet improvement, and shareholder equity. Capital returns include the 3.45% dividend yield and a 0.66% reduction in YOY share count. The balance sheet highlights include increased assets and a 7% improvement in shareholder equity. 

Analysts' Sentiment Firmed Ahead of the CPB Release 

The analysts are still not on board the CPB turn-around story, but sentiment is firming. Analysts released two notable reports days before the release, including an updated price target with an above-consensus price tag and an initiated Buy whose target is also above the consensus. The two targets imply a 10% upside for this market, enough to put it at a one-year high, and more revisions may come now that the results are in. 

Institutional activity aligns with the idea of a price floor for this market. The institutions bought CPB stock on balance for five consecutive quarters and have lifted their holdings to over 50%. Their activity spiked in Q1 and was on track to hit a multi-year high going into the release and may accelerate now that guidance is in. 

Turning to the chart, support is solid at $40.75, so no new lows are expected. A move to that level would be a suitable entry point but may not come soon. Assuming the market can sustain support above the 150 and 30-day EMAs, it should continue to drift higher within its trading range, with a chance of breaking to new highs later this year.