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Neutral on Campbell Soup

Zacks Equity Research

We retain our long-term Neutral recommendation on Campbell Soup Company (CPB). We remain encouraged by the company’s efforts to boost its top line through its focus on brand expansion. However, we remain on the sidelines given the company’s earnings and sales miss in the recent quarter compared to last year.

Campbell’s second-quarter 2012 earnings of 64 cents per share dropped 10% compared to the year-ago quarter, but surpassed the Zacks Consensus Estimate by a couple of cents. During the quarter, net sales inched down 1% from the prior-year quarter to $2,112 million, missing the Zacks Consensus Estimate of $2,116 million.

The decrease was primarily due to a negative impact from volume and mix of 3% and a 1.0% increase in promotional spending, partially offset by a 3% spike in price and sales allowances.

During the first half of 2012, the company made significant progress in the direction of its strategic plan to boost its top line and increase return on investment, with primary focus on brand expansion. The company’s plan mainly includes three core strategies: stabilization of the North American soup and simple meal business, overseas expansion, and growth of healthy beverages and baked snacks business.

Moreover, Campbell’s strategy is focused on bringing innovation across its portfolio while sketching a growth plan based on consumer expectations. As a result, the company launched 27 new products in fiscal 2012 while emphasizing on brand advertisement and consumer promotional activities.

We believe Campbell’s prudent investment and strategic initiatives toward product innovation and brand building will boost its customer base as well as profitability. Moreover, the company’s continuous focus on research and development to further differentiate its higher-margin sauces brands will strengthen its competitive position in the international market.

However, rising commodity costs, intense competition from other established players and exposure to unfavorable foreign currency fluctuations may undermine the company’s future growth prospects.

Campbell Soup operates in a highly competitive food industry and experiences worldwide competition in all its principal products from such well-established rivals as General Mills Inc. (GIS) and H. J. Heinz Co. (HNZ). This may dent the company’s performance.

Currently, Campbell Soup has a Zacks #4 Rank, implying a short-term Sell rating on the stock.

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