Things aren’t looking good for Campbell Soup Company CPB at the moment. This manufacturer and marketer of food and beverage products has been ravaged by inflation, rise in supply-chain expenses and some executional headwinds related to its transformation plan (mainly in the Snacks segment). These headwinds lingered in third-quarter fiscal 2021, wherein management slashed its adjusted earnings before interest and taxes (EBIT) and adjusted earnings per share (EPS) guidance for fiscal 2021.
Incidentally, Campbell Soup has been witnessing downward earnings estimate revisions of late. The Zacks Consensus Estimate for fiscal 2021 has moved 2.3% lower in the past seven days to $2.91, which suggests a 1.4% fall from the figure reported in the year-ago period. Also, Campbell Soup has an unimpressive VGM Score of C.
Additionally, investors seem quite jittery as shares of this Zacks Rank #5 (Strong Sell) stock have dropped 5.4% so far this year, against the Zacks Food - Miscellaneous industry’s growth of 7.8%.
Factors Plaguing Campbell Soup
Campbell Soup’s top and bottom lines declined year over year and missed the Zacks Consensus Estimate in the fiscal third quarter. Sales were largely hurt by tough comparisons with the year-ago period, which benefited from the initial demand spike due to the pandemic-led at-home consumption. Apart from this, quarterly results were affected by the increasing inflationary landscape.
We note that Campbell Soup has been struggling with cost inflation for a while. During the third quarter of fiscal 2021, adjusted gross margin contracted 290 basis points to 31.8%. The downside was caused by cost inflation (especially freight rate), other supply-chain expenses, adverse mix and reduced operating leverage. The gross margin bore the brunt of an increasing inflationary landscape, transition into a post-pandemic operating environment, short-term rise in supply-chain expenses and some executional headwinds related to the transformation plan (mainly in the Snacks segment).
Adjusted EBIT plunged 27% mainly on account of lower sales volumes and reduced adjusted gross margin, somewhat made up by a decline in marketing and selling costs. In fact, management expects to encounter continued margin pressure in the fourth quarter due to its transitioning out from the pandemic-led landscape as well as escalated inflation.
For fiscal 2021, the company now expects net sales to decline in a band of 3-3.5%. Further, adjusted EBIT are now envisioned to decline 4-5% in fiscal 2021. Adjusted EPS are envisioned in the range of $2.90-$2.93 now, indicating a 1-2% dip from adjusted EPS of $2.95 reported in the year-ago period.
Why Invest in Food Stocks?
Just like Campbell Soup, several players in the miscellaneous food space are grappling with rising input costs. Additionally, food companies have been witnessing high costs and supply-chain bottlenecks associated with operating amid the pandemic.
Nevertheless, there are some food stocks that hold promise despite such headwinds in the industry. These companies look well positioned on the back of their impressive initiatives to mitigate cost-related challenges. Moreover, companies have been making continued investments to enhance their offerings through customer-friendly innovation as well as acquisitions and other expansions. Also, undertaking prudent divestitures has been helping a number of food companies to focus on areas with higher growth potential. Increased investments to bolster e-commerce capacities amid rising digital penetration have also been aiding.
Notably, many food companies are seeing a gradual rebound in their foodservice businesses as outdoor dining is coming back into the picture with increased inoculation and curbs being lifted. That being said, elevated at-home consumption induced by the pandemic is also working favorably for several food players.
All said, we have shortlisted three rock-solid food bets, which carry a Zacks Rank of #1 (Strong Buy) or 2 (Buy), and have returned more than the industry on a year-to-date basis. You can see the complete list of today’s Zacks #1 Rank stocks here.
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3 Delicacies to Put on Your Investment Platter
Medifast, Inc. MED, which has returned 36.9% year to date, is a leading manufacturer and distributor of clinically-proven healthy living products and programs.The Zacks Rank #1 stock has been flourishing on strength in its OPTAVIA lifestyle solution and coaching support system, given the evolving consumer interests in health and wellness. Moreover, management is focused on optimizing and increasing capacity by strengthening its network of co-manufacturers. Apart from this, Medifast’s focus on the development of a digital-first approach is yielding results. The Zacks Consensus Estimate for its 2021 sales and earnings suggest growth of 53.1% and 47.4%, respectively, from the figure reported in the year-ago period. We note that Medifast has a trailing four-quarter earnings surprise of 12.7%, on average.
Darling Ingredients Inc. DAR has rallied 14.4% on a year-to-date basis. The global provider of natural ingredients is benefiting from its focus on adding innovative products to its portfolio. Moreover, the Zacks Rank #1 company’s investments in capacity expansion bode well. Apart from these, Darling Ingredients’ feed segment is gaining on rising commodity price environment for proteins and animal fats, among others. The Zacks Consensus Estimate for its 2021 sales and earnings indicate growth of 15.8% and 45.4%, respectively, from the year-ago period’s reported figure. We note that Darling Ingredients has a trailing four-quarter earnings surprise of 29.8%, on average.
Nomad Foods Limited NOMD is a leading frozen food provider. The company, whose shares have gained 18.7% so far this year, carries a Zacks Rank #2. Well, Nomad Foods’ focused investments in building brands, effective advertising and innovations are working favorably. Moreover, the company’s planned acquisition of Fortenova's Frozen Food Group bodes well. The Zacks Consensus Estimate for its 2021 sales and earnings call for growth of 12.4% and 24.7%, respectively, from the prior-year’s numbers.Nomad Foods has a trailing four-quarter earnings surprise of 10.3%, on average.
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