Campbell Soup (NYSE:) hit its 2020 high of $53.48 on August 26. Since then, the stock has fallen 17.4% to reach its current price of $44.14. Shares are well below the latest 5-year high close of $63.84 on Feb. 9, 2017.
Source: Investing.com
CPB has a total return that is lower than for packaged foods industry for the 1-, 5-, 10- and 15-year periods. Over the past 15 years, the CPB's total annualized return has been less than ? that of the broader stock market.
CPB Trailing Total Returns vs. Packaged Food Industry and US Stock Index
Source: Morningstar
CPB has a beta of 0.6 versus the . Historically, low beta stocks have delivered higher returns than expected based on CAPM (Capital Asset Pricing Model), but I fear another effect is countering this historic advantage. As an increasing proportion of money flows go to index funds, low beta stocks tend to underperform. When the S&P 500 is up 1% (down), a stock with a beta of 1.0 tends to move up 1% (down) and CPB tends to move up 0.6% (down). As the market rises in a bull market, low beta stocks tend to have a declining allocation in market cap-weighted indexes because they gain less than higher beta stocks. As new money flows into the index, the low beta stocks gradually receive from this influx over time.
The share price/earnings ratio of 15.3 and dividend yield of 3.4% look reasonable. The concern is profit growth. The consensus outlook is that the EPS for 2022 and 2023 will be lower than in 2021, although 2024 is expected to be 6.4% above 2021. The expected 3-5 year annualized EPS growth is 0.67% per year. These are not encouraging numbers.
When analyzing stocks, I consider two forms of consensus outlook. The first is the well-known consensus assessment and price target of Wall Street analysts. The second is the consensus outlook for the probability of the range of price returns, as reflected in option prices. This is called the market implied outlook. The price of an option represents the market's consensus estimate of the probability that the share price of the underlying stock (CPB, in this case) will rise above (call option) or below (put option) (the strike price) between now and when the option expires . By analyzing option prices with a series of strikes and a common expiration date, it is possible to derive the market's probabilistic outlook for price returns that reconcile option prices. For readers unfamiliar with this concept, I have written a brief overview of market implied outlook, including links to the relevant financial literature.
Wall Street Consensus Outlook for CPB
eTrade' Wall Street's consensus forecast calculation combines the views of 9 ranked analysts who have published ratings and price targets over the past 90 days. The consensus rating is neutral and the 12-month consensus price target is 3.8% above the current price.
Wall Street Consensus Rating and Price Target for 12 Months . The consensus rating is neutral and the 12-month consensus price target is $45.73, nearly identical to the value calculated by eTrade. Wall Street Consensus Rating and 12 Month Price Target .com
The eTrade and Investing.com consensus ratings for CPB are both neutral. With a 3.75% expected price increase over 12 months and the dividend yield of 3.4%, the expected total return for the coming year is 7.2%. call and put options on the CPB with a series of strikes, all expiring on January 21, 2022, to generate the market implied outlook for the next 4.3 months (from now to expiration). The resulting market-implied outlook closely matches option prices. Theoretical option prices calculated using the market implied outlook correspond to the market prices of the options with an average error of 1.3% of the market prices. Today to January 21, 2022
Source: Author calculations using option quotes from eTrade
There are two small spikes in probability, and the maximum probability corresponds to a price return of -3, 5% for the next 4.3 months. It is not uncommon for market-implied outlook to show two small spikes. The annualized volatility of this distribution is 23.7%. eTrade has a tool that calculates the implied volatility for options, and the value for the January 21, 2022 options is 22%. a version of the market-implied probability distribution with the negative yield side rotated around the vertical axis (see chart below). 21, 2022
Source: Author's calculations using options quotes from eTrade. The negative return side of the distribution is rotated about the vertical axis.
Viewed in this way, it is clear that there are consistently higher chances of negative returns than positive returns of the same magnitude. The higher chances of negative returns usually indicate a bearish outlook, although there are two mitigating factors. The first is that, in theory, market-implied outlooks would have a negative bias, as risk-averse investors tend to overpay for downside protection. In addition, dividend-paying stocks tend to have a negative tilt in the market-implied outlook because the dividends reduce the upside potential relative to the downside. In considering these two securities, I interpret this market implied outlook as neutral. Since the trading volume for options on CPB is quite small, I did the same analysis with options expiring in February 2022 and got very similar results.
Summary
Campbell Soup struggles to grow. The consensus outlook assumes very low earnings growth. The consensus on Wall Street is neutral, with prices expected to rise 6% over 12 months. As a rule of thumb for granting a buy recommendation, I want to see a 12-month expected return for a stock that is at least half of its expected annualized volatility. Taking into account Wall Street's 12-month consensus price target of 7.2%, at face value, and using the expected volatility of the market-implied outlook, 23.7%, the CPB falls far short. The market implied outlook for early 2022 is neutral with a slight bearish tilt. All in all, the CPB is not an attractive investment. There is insufficient expected return to justify the level of risk. My final rating is neutral.
