Campbell Soup Earnings: Competitive Angst Overshadows Prudent Investments and Solid Execution

While the market wasn’t enamored with wide-moat Campbell Soup’s lukewarm results in its third fiscal quarter (with shares off a touch)—likely due to concerns surrounding macro and competitive pressures—we saw some green shoots. First, despite flat net organic sales of $2.2 billion, this came on the heels of sequential volume improvement (flat in the quarter, from a 2% decline in the second quarter). In addition, the recently acquired Sovos Brands (which officially came under the Campbell umbrella in March) boasted strong top-line momentum across its sauces, soups, and frozen pizza mix; we think this business stands to benefit from Campbell’s financial resources and entrenched retailer relationships, which should spur additional distribution gains as the integration progresses. Further, supply chain productivity and cost savings more than offset the impact of cost inflation (a 240-basis-point drag), resulting in a 30-basis-point uptick in adjusted gross margin (to 31.2%). When taken together, our $61 fair value estimate and long-term outlook (low-single-digit organic sales growth and high-teens operating margins) shouldn’t see a material change, rendering shares attractive, trading at a 30% discount to our intrinsic valuation.