On Wednesday, Campbell Soup (NYSE:CPB) stock ignited higher, rallying over 10% to $36.21 and closing near session highs. The price action has long-term and short-term investors alike clamoring that Campbell Soup stock is poised to rise further. So is Campbell Soup stock back on track or is this setting up to be another opportunity to sell CPB?
CPB stock is climbing thanks to the company’s better-than-expected second-quarter earnings results. Non-GAAP earnings of 77 cents per share of Campbell Soup stock came in 7 cents or 10% ahead of analysts’ average estimate, but its GAAP results were much lower, featuring a 20 cent loss per share. But CPB’s revenue jumped 24.3% year-over-year to $2.71 billion, beating analysts’ consensus by $50 million.
Guidance calls for full-year revenue of $9.975 billion-$10.1 billion and earnings per share of $2.45 -$2.53. Both were ahead of consensus expectations, which currently call for sales of $9.91 billion and EPS of $2.44.
Valuing Campbell Soup Stock
How is Campbell Soup really doing? The company’s revenue is exploding higher, thanks to its recent acquisitions. CPB’s sales jumped 26% YoY, due to its acquisitions of Snyder-Lance and Pacific Brands deals. But the growth of its other units continue to slow. That’s not really surprising, since CPB turned to M&A in the first place because its growth was slowing.
Also worth pointing out is that CPB’s adjusted gross margin dropped 4.3 percentage points to 30.9%. The company reported a GAAP loss per share due to an impairment charge related to its Campbell Fresh unit.
The owners of Campbell Soup stock are hoping that its new product portfolio will enable its revenue to resume growing again. On average, analysts expect its revenue to increase 14% this year. Given management’s guidance, though, we already know that this year’s consensus revenue estimate might be a little low.
However, at the midpoint of management’s FY19 EPS guidance, CPB would report earnings of about $2.45 per share of Campbell Soup stock. That’s a decline of more than 13% year-over-year. For FY20, estimates call for growth of about 5%. Despite how dramatically the company’s revenue growth has picked up thanks to its recent acquisitions, its earnings growth hasn’t accelerated.
As it stands, CPB stock trades at about 14.6 times the midpoint of its FY19 EPS guidance. Some could argue that, considering that its earnings growth is expected to decline this year and that its EPS is expected to rise just 5% next year, the valuation of Campbell Soup stock is a bit rich. With a 3.8% dividend yield though, some investors may feel that the valuation of CPB stock is appropriate given its yield and the fact that Campbell Soup’s business is regaining some momentum.
No matter how you cut it, though, CPB stock is better than the disaster of Kraft Heinz (NYSE:KHC) .
A look at the two-year daily chart of Campbell Soup shows the tough downtrend that Campbell Soup stock has been trapped in. Each time CPB stock rallies, it has been met with downtrend resistance (depicted by the blue line on the chart above). That downtrend resistance is now on a similar trajectory as the 200-day moving average of Campbell Soup stock. Together, they could either make it very difficult for CPB bulls or give them plenty of ammo to rally the stock.
Why is that?
If Campbell stock rallies up to the $37-ish area, that level will either act as resistance, causing CPB stock to move lower or trigger a big-time breakout of CPB stock. If the latter scenario unfolds, a move to $42 is possible.
If the 200-day and downtrend line become resistance, look to see how CPB stock responds to the pullback. Do its 50-day and 21-day moving averages become its support? Or do they give way and allow CPB stock to drift down to its $32 support level.
If the 50-day becomes support, I believe that bulls will have another good chance to retest the stock’s resistance levels. If Campbell Soup stock drops below its 50-day moving average, however, my concerns about the shares will increase considerably.