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Bear of the Day: Campbell Soup Company (CPB)

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Today’s Bull of the Day is in a great position because it has the ability to pass along wholesale price increases to customers who don’t have a choice except to accept them and keep buying.

Campbell Soup Company (CPB - Free Report) does not enjoy that sort of market pricing power and it’s weighing heavily on earnings expectations.

Frankly, it seems almost un-American to make Campbell’s the Bear of the Day. I’m guessing there’s almost nobody reading this that didn’t grow up having Campbell's chicken noodle soup when they were home sick from school or enjoying a grilled cheese sandwich with Campbell’s tomato soup. It’s a delicious, nutritious, and affordable meal. The brand is so iconic that the red-labeled cans are what most people visualize when you say “soup.”

The relatively low retail cost that’s an asset for tight family budgets is also a liability in an environment of rising commodity prices. The prices of things like chicken and tomatoes have been rising, but there’s an upper limit on how much you can charge for a can of soup before customers simply walk to a different aisle in the grocery store and buy something else.

It’s a basic economic concept. The price elasticity of a good is directly related to the number of substitutes that are available.

With PoolCorp (POOL), we see that consumers don’t have a readily available substitute. They have to choose between paying the company’s prices or seeing their expensive investment turn into a backyard swamp.

The supermarket is a very common Econ 101 example for the concept of substitution. When the price of one good rises, consumers can simply choose something else that’s often only a few feet away. People buy a lot of food – we need it to live, after all – so manufacturers can still thrive in an environment of intense price competition and low margins because of high volume.

Those manufacturers are vulnerable to fluctuations in the prices of raw materials that are largely beyond their control.

After beating the Zacks Consensus Earnings Estimate for thirteen consecutive quarters, Campbell reported disappointing revenues and earnings last week, netting $0.52/share on $1.984B in sales. Analysts had been expecting $0.55/share and $1.998B, respectively. Those misses weren’t terribly significant, but the accompanying reduction in guidance was.

CEO Mark Clouse stressed ongoing strength in brand loyalty, but also noted an inflationary environment, contracting margins and short-term supply chain difficulties. The company reduced full year earnings guidance from a range of $3.03 - $3.11/share down to $2.90 – $2.93/share.

If you’re a technology growth stock investor, a company dropping guidance by thirteen cents might seem like a rounding error, but for a huge food conglomerate, it matters a lot. Cost reduction efforts promise to limit the damage, but the revenue and earnings picture going forward can easily be described as “underwhelming."

Zacks Investment ResearchImage Source: Zacks Investment Research

Those red cans will be on the shelves of your local store for a long time, but from the perspective of an investor, there’s so much growth available elsewhere that it doesn’t make much sense to hold CPB shares right now.

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