HNZ H.J. Heinz Company

We have downgraded our rating from 'Neutral' to ‘Underperform’ on Campbell Soup Co. (CPB) as the company recorded yet another weak operating performance in the second quarter of 2011. The company’s earnings per share inched down 4% to  71 cents per share from 74 cents per share in the year-ago period primarily due to contraction in top line and operating margin, resulting from adverse product mix, rising commodity cost and increased advertisement and promotional expenses. We have a target price of $30.00 per share on the stock. 

The U.S. market continued to remain sluggish throughout the second quarter of fiscal 2011. Despite maintaining strong advertising and promotional support, volumes declined for the company’s products. Moreover, the company’s initiatives to change the product mix and reposition the business in the U.S. market will require significant expenditure to support increased advertising and promotional activities. This is likely to undermine Campbell’s overall operating performance, moving forward.

Additionally, Campbell ended second-quarter 2010 with long-term debt of $1,937.0 million, reflecting a debt-to-capitalization ratio of 68%, which is substantially steep, and could adversely affect the company’s credit worthiness and make it more susceptible to the macro-economic factors and competitive pressures.

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

Moreover, due to its exposure to the international market, Campbell Soup remains prone to currency fluctuation. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins outside the U.S.

Campbell Soup holds a Zacks #5 Rank, which translates into a short-term Strong Sell recommendation.

 
CAMPBELL SOUP (CPB): Free Stock Analysis Report
 
GENL MILLS (GIS): Free Stock Analysis Report
 
HEINZ (HJ) CO (HNZ): Free Stock Analysis Report
 
Zacks Investment Research