Declining Processed Food Sales And Tariffs Will Weaken Prospects

Key Takeaways

• Shifting consumer preferences and increased competition from private labels are eroding Campbell's core categories, pressuring volumes, pricing power, and brand relevance.
  
• Rising regulatory and tariff costs, combined with innovation challenges, are tightening profit margins and hindering efforts to revive long-term growth.
  
• Product innovation, resilient core brands, cost-saving initiatives, strategic pricing, and trends favoring at-home cooking position Campbell's for stable growth and improved profitability.

Catalysts

Manufactures and markets food and beverage products in the United States and internationally.

• Ongoing shift in consumer preferences toward healthier, fresh, and organic foods is likely to accelerate declines in Campbell's core processed and canned food categories, leading to persistent volume declines and long-term revenue stagnation.
  
• Rising consumer appetite for private labels and discount brands, especially as household budgets remain under pressure, threatens Campbell's pricing power and margin structure, with increasing risk of gross margin compression as competitive intensity in key categories rises.
  
• Significant import tariffs-expected to amount to approximately 4% of cost of products sold and predominantly impacting Campbell's Meals & Beverages division-cannot be fully offset by productivity gains or selective price increases due to elastic consumer demand, directly reducing operating margins and net earnings in coming years.
  
• Difficulty in executing consistent and impactful innovation within core soup and snack segments is compounding underlying category headwinds, risking further brand obsolescence, loss of market share, and sustained long-term pressures on top-line growth.
  
• Heightened regulatory scrutiny and stricter guidelines on sodium, preservatives, and packaging in packaged foods are likely to require costly product reformulations and supply chain investments, elevating the cost base and putting further pressure on profitability and net margins over time.

Campbell's Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Campbell's compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Campbell's's revenue will decrease by 1.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.9% today to 7.0% in 3 years time.
• The bearish analysts expect earnings to reach $695.1 million (and earnings per share of $2.34) by about September 2028, up from $602.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, down from 16.6x today. This future PE is lower than the current PE for the US Food industry at 19.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Campbell's Future Earnings Per Share Growth

Risks

• Campbell's product innovation pipeline, especially in health and wellness (e.g., avocado oil Kettle Chips, Pacific bone broths) and premium products like Rao's and Milano White Chocolate, is driving incremental sales and category outperformance, which could lead to higher long-term revenues and support future net income growth.
  
• The continued strength in core brands and stable or rising household penetration, particularly in categories like condensed soups, broths, cookies, and sauces, indicates strong brand equity and resilience, which may stabilize or increase overall sales, offsetting revenue pressure.
  
• Expansion of cost-saving initiatives, highlighted by the $375 million Peak program and successful Sovos integration, is expected to drive improved productivity and margin recovery over time, creating upside to operating earnings and profitability despite near-term headwinds.
  
• Campbell's ability to selectively implement price increases, combined with targeted marketing investment and supply chain optimization, enables the company to better manage cost inflation and tariff pressures, supporting earnings and operating margin preservation.
  
• The secular trend of increased at-home cooking and consumer search for value, combined with Campbell's leadership in meal solutions and sauces, may support ongoing top-line growth and category share gains, enhancing long-term revenue and cash flow stability.

Valuation

• The assumed bearish price target for Campbell's is $29.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Campbell's's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $62.0, and the most bearish reporting a price target of just $29.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $10.0 billion, earnings will come to $695.1 million, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $33.49, the bearish analyst price target of $29.0 is 15.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.