Campbell's Small--but Strategic--Deal

Despite the small size of the deal, we think it is strategic, providing Campbell with another means of bolstering its shelf space in the natural and organic aisle, which has been winning out at the expense of traditional center-store categories (growing at a midteens rate, far in excess of center-of-the store categories, where growth has remained tepid). Further, we aren’t surprised Campbell would opt to ink a tie-up, as its own attempts to garner a larger foothold in the space (with the launch of its organic line in 2015 and its Well Yes! brand, a line of soup with simpler ingredients) have failed to gain much traction with consumers. However, we aren’t blind to the fact that despite the high growth, margins for organic fare are more muted at one third to one half of the mid-20s the traditional soup category boasts, weighing on Campbell’s consolidated profitability in the longer term.

We’ve expected Campbell would apportion its excess free cash flow (which averages in the low-double-digits as a percentage of sales annually) to make acquisitions. And we doubt that its thirst for deals has been quenched. But in our view, Campbell has been a prudent capital allocator in the past (returns on invested capital have exceeded our cost of capital estimates in each of the past 10 years), and we think it will continue operating with this level of discipline.

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