Don't Panic on Campbell Soup

Prior to Campbell Soup's reporting first-quarter results, the company had been "M'm M'm Good!" for investors. While investors have soured on the company over the past few days, it's important to look at the big picture. Campbell Soup made some telling statements that indicate this quarter is likely an aberration. While most companies would lead investors to believe this after a poor quarter, Campbell Soup offers concrete reasons for the likelihood of future improvements. That said, it's possible that General Mills or Kellogg might present a better investment opportunity going forward.

Recent results
Campbell Soup saw first-quarter sales slide 2% year over year, with organic sales declining 4%. Adjusted EPS declined 21% to $0.66.

At first glance, this might make you want to negate Campbell Soup as a potential investment option. However, the primary reason for the poor quarter was inventory retailer movements, which attributed for more than half of the decline in organic sales. In regards to the bottom line, Campbell Soup front-loaded the quarter with product investments and marketing, primarily to drive growth for Bolthouse Farms. Additionally, the voluntary recall of Plum Organics pouch products didn't help matters.

What's important here is that these are all temporary events. Retailer inventory timing won't always be off, increased product investments should lead to improved second-quarter results, and the voluntary recall for Plum Organics pouch products is a non-issue that should fade from consumer and investor minds in due time.

If you're concerned about the reduced FY 2014 guidance of 4%-5% sales growth and 2%-4% EPS growth, then keep in mind that this reduced outlook relates to the weak first quarter, which already happened.

Looking ahead, Campbell Soup plans on launching eight new soups, expanding internationally with the Kelsen Group (think Royal Dansk cookies), and increasing its exposure in emerging markets. Furthermore, Campbell Soup noted that it has already seen stronger shipments of soup, broth, and stuffing in the second quarter.

Considering all the optimism, it would be difficult to imagine that one the company's peers presents a better investment option, but anything is possible.

General Mills and Kellogg
General Mills maintains a No. 1 or No. 2 position in growing food categories worldwide. Its brands include Cheerios, Green Giant, Betty Crocker, Pillsbury, Yoplait, Nature Valley, Haagen-Dazs, and more.

General Mills generated just shy of $18 billion in sales in its last fiscal year. What's most interesting is that 60% of its sales come from domestic retail products. This might sound like a negative, but it indicates that there's a lot of growth potential ahead. General Mills is just beginning to scratch the surface of international markets. It generated $5.2 billion in international sales in its last fiscal year, but that number is likely to grow as the company broadens its international exposure. If demand is high in many markets, then it makes sense to test out new markets as well.

Kellogg is more diversified than most people realize, owning popular brands such as Cheez-It, Special K, Keebler, Pop-Tarts, Famous Amos, Eggo, Frosted Flakes, and Froot Loops. It also owns lesser-known brands, including Morningstar Farms, Krave, and FiberPlus Antioxidants.

Kellogg now expects full-year earnings per share to come in the low end of the $3.75-$3.84 range. This is based on weaker-than-expected sales in certain categories. Kellogg, however, does expect net sales growth between 4% and 5% and cash flow between $1.1 billion and $1.2 billion.

Kellogg has announced planned initiatives as a reaction to a changing marketplace. These initiatives are part of Project K, and they include optimizing the supply chain and improving global business services through consolidation, as well as a new focus on global categories.

Effective managements
All three of the companies have taken care of their shareholders. Take a look at total shareholder return (stock appreciation + dividend payments) over the past five years:

GIS Total Return Price Chart
GIS Total Return Price Chart

GIS Total Return Price data by YCharts.

All three companies currently yield 3%, but General Mills is the most attractive on a valuation basis, trading at 18 times earnings. Campbell Soup and Kellogg are trading at 27 and 23 times earnings, respectively.

The bottom line
Campbell Soup is a strong company with broad product diversification and a lot of upside potential for the second quarter. It's likely to continue to reward shareholders. Kellogg should also see long-term success given its poised initiatives. However, in my opinion, General Mills offers the most potential of the three, thanks to its strong history of rewarding shareholders, highly diversified portfolio that targets a wide range of consumers, domestic standing, and international growth potential.

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