General Mills, Inc. (GIS) in Minneapolis, Minn., and Camden, N.J.-based Campbell Soup Company (CPB) are two prominent players in the packaged foods industry. GIS manufactures and markets branded consumer foods, including snacks, ready-to-eat cereal, convenient meals, yogurt, wholesome natural pet food, super-premium ice cream, baking mixes and ingredients, and refrigerated and frozen dough. It also supplies branded and unbranded food products to the food service and commercial baking industries. In comparison, CPB manufactures and markets branded convenience food products, including soups and sauces, biscuits and confectionery, and food service through its Meals & Beverages and Snacks segments. It sells its products through retail food chains, mass discounters and merchandisers, club stores, convenience stores, drug stores, dollar stores, e-commerce, and independent contractor distributors.
High inflation, deepening supply chain issues, and rising energy and transportation costs have pushed food prices higher lately. However, strong consumer demand for packaged and ready-to-cook food products with prolonged shelf life should allow companies operating in this space to overcome rising input costs by passing them on to their customers. Also, the introduction of new products to meet changing consumer tastes and rapid digitalization of operations should benefit these companies substantially.
Investor interest in the consumer defensive industry is evidenced by First Trust Nasdaq Food & Beverage ETF’s (FTXG) 6.7% gains year-to-date versus the SPDR S&P 500 Trust ETF’s (SPY) 12.4% loss. The global packaged food market is expected to grow at a 6.3% CAGR to $4.26 trillion by 2026. So, both GIS and CPB should benefit. But while CPB has gained 4.2% in price over the past nine months, GIS has surged 19.7%. GIS is also a winner with 5.4% gains over the past month versus CPB’s 4.1% returns. But which of these stocks is a better pick now? Let’s find out.
Recent Financial Results
GIS’ total net sales for its fiscal 2022 third quarter, ended Feb. 27, 2022, increased marginally year-over-year to $4.54 billion. The company’s adjusted gross profit came in at $1.43 billion for the quarter, down 4.4% from the prior-year period. Its adjusted operating income came in at $676.50 million, indicating a 5.5% decline from the prior-year period. While its adjusted net earnings increased 1.1% year-over-year to $513.90 million, its adjusted EPS grew 2.4% to $0.84. As of February 27, 2022, the company had $844.40 million in cash and cash equivalents.
For its fiscal 2022 second quarter, ended Jan. 30, 2022, CPB’s total net sales decreased 3.1% year-over-year to $2.21 billion. The company’s adjusted gross profit came in at $671 million, down 12.9% from the year-ago period. Its adjusted EBIT was $318 million, representing a 16.8% decline from the prior-year period. CPB’s adjusted net income decreased 16.5% year-over-year to $208 million. And its adjusted EPS came in at $0.69, representing a 15.9% year-over-year decline. As of Jan. 30, 2022, the company had $357 million in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, GIS’ revenue and EBITDA have increased at CAGRs of 3.9% and 1.4%, respectively. GIS’ EPS is expected to increase 1.1% year-over-year in its fiscal year 2022, ending May 31, 2022, and 3.4% in its fiscal 2023. Its revenue is expected to grow 4.2% in its fiscal 2022 and 1% in fiscal 2023. Analysts expect the company’s EPS to grow at a 4.3% rate per annum over the next five years.
CPB’s revenue and EBITDA have increased at CAGRs of 5.2% and 1.7%, respectively, over the past three years. Analysts expect CPB’s EPS to decline by 6.7% year-over-year in its fiscal 2022, ending July 31, 2022, and increase by 3.2% in fiscal 2023. Its revenue is expected to decline 0.8% year-over-year in its fiscal year 2022 and rise 1.7% in its fiscal 2023. Analysts expect the company’s EPS to grow at a 0.8% rate per annum over the next five years.
Valuation
In terms of forward EV/Sales, GIS is currently trading at 2.92x, which is 29.2% higher than CPB’s 2.26x. And in terms of trailing-12-month Price-to-Book, CPB’s 4.18x compares with GIS’ 4.36x.
Profitability
GIS’ trailing-12-month revenue is almost 2.3 times CPB’s. Also, GIS is more profitable, with a 33.4% gross profit margin versus CPB’s 31.5%.
Furthermore, GIS’ EBIT margin and net income margin of 17.2% and 12.4%, respectively, compare with CPB’s 16.7% and 11.1%.
POWR Ratings
While GIS has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, CPB has an overall C grade, which equates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both GIS and CPB have a B grade for Quality, which is consistent with their higher-than-industry profitability ratios. GIS’ 12.4% trailing-12-month net income margin is 134.8% higher than the 5.3% industry average. CPB has an 11.1% trailing-12-month net income margin, which is 110.8% higher than the 5.3% industry average.
In terms of Value, both GIS and CPB have been graded a C, which is in sync with their slightly higher-than-industry valuations. GIS’ 4.27x trailing-12-month Price/Book is 42% higher than the 3.01x industry average. CPB has a 4.07x forward Price/Book, which is 35.4% higher than the 3.01x industry average.
Among the 86 stocks in the B-rated Food Makers industry, GIS is ranked #22, while CPB is ranked #26.
Beyond what we have stated above, our POWR Ratings system has also graded GIS and CPB for Sentiment, Stability, Momentum, and Growth. Get all GIS ratings here. Also, click here to see the additional POWR Ratings for CPB.
The Winner
Despite rising input costs, the strong demand for packaged food products should benefit GIS and CPB in the coming months. However, higher profitability makes GIS a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Food Makers industry.
GIS shares were trading at $71.55 per share on Wednesday afternoon, up $0.52 (+0.73%). Year-to-date, GIS has gained 7.77%, versus a -11.77% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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