- Campbell Soup is a classic defensive stock
- Expected earnings growth is very low over the next 3 to 5 years
- Wall Street consensus rating is neutral, with an expected 12-month price appreciation of around 5.5%
- The market-implied outlook is slightly bearish
Consumer staple stalwart Campbell Soup (NYSE:CPB) is a classic defensive stock, with a 5-year beta of 0.49 relative to the S&P 500.
Low-beta stocks often fare poorly in market conditions that favor growth, and that has certainly been the case for CPB. The shares have trailing 1-, 3- and 5-year total returns of -7.7%, 9.8% and -3.3% (respectively, annualized) as compared to 7.3%, 16.0% and 14.0% for SPDR® S&P 500 (NYSE:SPY) over the same periods.
Source: Investing.com
The US-based food manufacturer's recent FY 2022 Q2 results beat expected EPS by $0.01 per share but missed revenue forecasts. Revenue is down 7.4% year-on-year and management cited COVID challenges, inflation, and logistical constraints.
The 3-to-5 year consensus for EPS growth of only 1.64% per year is anemic.
CPB has a 3.46% dividend yield, but a mixed dividend growth track record. While the 3-year growth rate is 12.1% per year, the 5- and 10-year rates are 2.3% and 2.5%, respectively. For income investors, a longer-term dividend growth rate that barely exceeds inflation is a concern.
On Sept. 15, 2021 when CPB shares were trading at $44.16, I assigned a neutral rating, and since the total return is -0.3%, as compared with -5.2% for SPY.
The earnings outlook then was very similar to today. The Wall Street consensus 12-month price target was $45.80, just a few percent above the share price at that time. Along with the fundamentals and the Wall Street consensus outlook, I look at the outlook for a stock that is implied by options prices, the market-implied outlook. In mid-September, the options indicated a neutral outlook.
For readers who are unfamiliar with the use of options prices to build an outlook, a brief explanation is warranted. The price of an option on a stock reflects the market’s consensus estimate of the probability that the stock price will rise above (call option) or fall below (put option) a specific level (the option strike price) between now and when the option expires.
By analyzing the prices of call and put options at a range of strike prices, all with the same expiration date, it is possible to calculate a probable price forecast that is consistent with the options prices. This is called the market-implied outlook and represents the consensus view among buyers and sellers of options. For readers who want more detailed information than is in the previous link, I suggest this (free) monograph from the CFA Institute.
I have calculated the market-implied outlook for CPB to early 2023 in revisiting my rating on CPB and I have compared this with the Wall Street consensus outlook, as in my previous analysis.
Wall Street Consensus Outlook For CPB
E-Trade calculates the Wall Street consensus outlook for CPB using ratings and 12-month price targets for CPB from seven ranked analysts who have published views over the past 90 days. The consensus rating is neutral and the consensus 12-month price target is 7.1% above the current share price.
Source: E-Trade
Investing.com calculates the Wall Street consensus outlook using a cohort of 17 analysts. The consensus rating is neutral and the consensus 12-month price target is 3.7% above the current share price.
Source: Investing.com
These two versions of the Wall Street consensus are generally consistent, with an average expected price appreciation of 5.4% over the next 12 months. The consensus expected total 12-month return (including the dividend) is 8.9%. In September, the consensus for expected 12-month total return was 7.2%.
Market-Implied Outlook For CPB
I have calculated the market-implied outlook for CPB for the 10.2-month period from today until Jan. 20, 2023, by analyzing prices of options that expire on this date. I selected this specific option expiration date to provide a view into early 2023 because options that expire in January tend to have more active trading than most other expiration dates.
The standard presentation of the market-implied outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal.
Source: Author’s calculations using options quotes from E-Trade
The market-implied outlook to early 2023 exhibits a definite tilt favoring negative price returns. The maximum probability corresponds to a price return of -10%. The expected (annualized) volatility calculated from this distribution is 28%, somewhat higher than the 24% from my September analysis. For comparison, E-Trade calculates 28% implied volatility for the CPB options expiring on Jan. 20, 2023. The market-implied outlook for CPB indicates a 1-in-5 chance (20th percentile) of having a return of -23% or worse over the next 10.2 months.
To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).
Source: Author’s calculations using options quotes from E-Trade
This view clearly illustrates that the probabilities of negative returns are consistently higher than the probabilities of positive returns of the same size for a wide range of the most probable outcomes. This is a moderately bearish market-implied outlook.
Theory suggests that the market-implied outlook will tend to have a negative bias because risk-averse investors are willing to pay more than fair value for downside protection. There is no way to directly measure whether this bias is present, however. Even considering that there may be some negative bias, however, this market-implied outlook still looks slightly bearish (although this assessment is somewhat subjective).
Summary
Although investors do not expect much earnings growth from a stock like CPB, they hope for consistency.
Campbell Soup is facing headwinds from inflation in a volatile market. The options market is the best source for expected volatility and the 28% annualized volatility for CPB is not comforting.
The Wall Street consensus outlook for CPB is neutral, with an expected 12-month total return of 7.2%. As a rule of thumb to identify an attractive risk-return proposition, I look for an expected 12-month total return that is at least half of the expected annualized volatility. CPB has a ratio that is close to 1/4th (7.2% return vs. 28% volatility). The market-implied outlook for CPB is slightly bearish for early 2023.
Considering the expected earnings growth in the next 3 to 5 years of 1.6% per year, along with the neutral Wall Street consensus and the slightly bearish market-implied outlook, I am maintaining my neutral rating on CPB.