Mmmm Good!

12/28/2015 8:00 am EST

Focus: STOCKS

John Stasak of Argus Research is recommending a leading food producer, noting how the company—best known for its soups—is now shifting its product mix toward faster-growing markets.

In June 2015, Campbell Soup Co. (CPB) acquired Garden Fresh Gourmet, which sells refrigerated salsa, hummus, dips, and tortilla chips.

In June 2013, Campbell purchased Plum Organics, a provider of organic baby food, with $93 million in 2012 revenue. In 2013, it also acquired Kelsen Group, which produces premium butter cookies.

In August 2012, Campbell completed its acquisition of Bolthouse Farms, a provider of premium beverages, refrigerated salad dressings, and fresh carrots, for $1.55 billion.

Management is working to improve the profitability of these businesses. In addition, management is focused on lowering costs and using the savings to invest further in its core brands.

Recent supply-chain improvements include the closure of four manufacturing plants and a 4% decline in the headcount. We believe that these cost savings initiatives and the company’s ability to raise prices warrant a higher P/E multiple.

Applying a multiple of 23—in line with the average for four other food and beverage companies in our coverage group—to our FY16 EPS estimate, we obtain a value of $65 per share.

CPB shares are trading at 18.4-times our revised FY16 EPS estimate and 17.2-times our FY17 forecast, compared to a five-year historical range of 13.5-21.1.

We believe the company’s cost savings initiatives and ability to raise prices warrant a higher forward P/E multiple. The average forward multiple for four other food and beverage companies that we cover is 23.

Applying this multiple to our FY16 estimate points to a value for CPB of $65 per share. Our target price of $65, combined with the dividend, implies a potential return of nearly 27% from current levels.

Based on our expectations for solid earnings growth in the coming years, our long-term rating remains a buy. We are setting a $65 price target.

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