While high-flying tech stocks and vaccine-focused pharma names grabbed headlines last year, many consumer staples stocks, like Clorox, also received investor attention.
Packaged food manufacturers and makers of sanitizers, disinfectants and other essentials experienced significant demand during lockdowns and even after. That said, the rollout of vaccines has led some to question if consumer staples companies will continue to see the level of pandemic-triggered demand like last year.
The defensive nature of consumer staples stocks during volatile markets makes investors look for interesting picks in this space. Using TipRanks’ Stock Comparison tool, we will pit two packaged food makers, Campbell Soup and Kellogg, against each other and select the stock offering a more compelling investment opportunity.
Campbell Soup (CPB)
The preference for at-home eating over dining out during the pandemic has been driving Campbell Soup’s sales over recent quarters. In the first quarter of FY21 (ended Nov. 1), the company’s sales grew 7% to $2.34 billion, while the organic growth rate was 8%. The top-line performance was backed by elevated at-home food consumption and improved soup inventories at retailers.
Strong sales growth and margin expansion drove a 31% rise in the 1Q adjusted EPS to $1.02. However, investors seemed concerned about the company’s soft 2Q earnings guidance, which calls for adjusted EPS growth in the range of 12%-15%, based on sales growth of 5%-7%.
Meanwhile, Campbell continues to invest in its brands to attract and retain new customers acquired over recent months. The company gained a significant number of household customers since the pandemic and it claims that higher repeat rates indicate that it is successfully retaining these new buyers.
The company is also focused on innovation, keeping in view evolving consumer needs. It is enhancing its better-for-you offerings and has re-launched its Well Yes! Brand. It is also introducing more organic options under its Pacific Foods brand.
Furthermore, Campbell is building its capacity to address the supply constraints that it has been facing amid improved demand trends. To expand its margins, the company is implementing multi-year cost savings initiatives with targeted cumulative savings of $850 million by the end of FY22. (See CPB stock analysis on TipRanks)
Credit Suisse analyst Robert Moskow believes that Campbell is undoubtedly poised to deliver another extraordinary year (FY21 ending July). That said, the analyst lowered his price target to $49 from $55 following the 1Q FY21 results and reiterated a Hold rating as he contended that the availability of highly effective COVID-19 vaccines is a major headwind for FY22.
Moskow also argued that the 2Q guidance for organic sales and EBIT growth reinforced concerns about decelerating growth and reintroduction of promotional discounts to retail partners and consumers.
The rest of the Street is cautiously optimistic about the stock, with 3 Buys and 4 Holds adding up to a Moderate Buy analyst consensus. With shares down 4.7% over the past year, the average price target of $53.29 reflects an upside potential of 17.2% in the year ahead.
Last month, Campbell hiked its quarterly dividend by 6% to $0.37, bringing its dividend yield to 3.21%.
Widely known for its cereals, Kellogg also owns several popular frozen food and snack brands. The current health crisis caused a spike in the consumption of at-home food options and helped Kellogg deliver a 1.7% rise in its 3Q 2020 sales to $3.43 billion. Excluding the impact of divestitures, the company posted organic sales growth of 4.5%, which marked a deceleration from the 9.2% growth in 2Q, due to the moderation in at-home consumption and continued softness in away-from-home channels and on-the-go products.
The company’s 3Q adjusted EPS fell 12% year-over-year to $0.91 due to brand-building investments, higher performance-based compensation and increased tax rate. Despite continued uncertainty, Kellogg increased its 2020 organic revenue growth guidance to 6% from 5%. The company pegged its 2020 adjusted EPS (excluding currency headwinds) growth forecast at 2%, compared to the previous outlook of a 1% decline.
Looking ahead, Kellogg is working on several new launches but investors are keen to know how the company’s entry into plant-based or alternative meat has been received. Kellogg disclosed on its 3Q conference call, that its MorningStar Farms’ alternative meat sub-brand Incogmeato was launched during the quarter and the company is still building up its distribution. The company launched Incogmeato burgers, sausage bratwurst and ground beef after much delay.
Piper Sandler analyst Michael Lavery isn’t bullish about the company’s growth story and recently downgraded Kellogg from Buy to Hold and lowered the price target to $66 from $76. The analyst expects the company’s revenue and earnings growth trajectory to lag its rivals over the next 1-2 years.
Lavery stated, “We expect moderating top-line momentum in 2021 coupled with higher expected spending, and we expect EBIT to decline in 2021 (admittedly against a tough comp). While Kellogg has solid top-line momentum into 2021, we have little visibility on positive catalysts to drive multiple expansion or significant upside to earnings over the next 1-2 years.”
Based on the updated tax rate, fewer share buybacks and less margin expansion, Lavery lowered his forecast for 2021 EPS to $4.00 from $4.20, and for 2022 EPS to $4.20 from $4.25. (See K stock analysis on TipRanks)
Overall, the Street is also sidelined on Kellogg, with a Hold analyst consensus based on 5 Holds and 1 Sell. Kellogg stock has declined 15.5% over the past year. The average price target of $66.67 indicates that the shares could rise about 14% from current levels.
Kellogg currently pays a quarterly dividend of $0.57 per share and its dividend yield stands at 3.84%.
Many analysts are predicting a moderation in the sales growth of packaged food companies as the year progresses. Currently, Campbell appears to be a better consumer staples pick based on its growth prospects, lower valuation and a higher upside potential in the stock.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment