Real Money's Jim Cramer loves to make up stock acronyms like FANG (Facebook (FB), Amazon (AMZN), Netflix (NFLX), Google/Alphabet (GOOGL)), but I can do it too.
How about these?
CAMS - Campbell Soup (CPB), Altria (MO), McCormick (MKC) and Smucker (SJM);
KASM - Kraft Heinz (KHC), Altria, Smucker and McCormick; and
KASH ¿ Kellogg (K), Altria, Smucker and Hershey (HSY).
The whole consumer staples sector is scorching hot. For example, year to date Kellogg is up 15%, while Campbell Soup is up nearly 30%.
I like to call these the "2 percenters." Most of these names have top-line growth of 2% or less. Kellogg, for instance, has an estimated revenue "growth" rate of 1.7%. Hershey's is at 2.8%, and J.M. Smucker is expected to grow about 2.4% this year. Spice-maker McCormick is the only name in the bunch that is projected to grow revenues more than 2% in 2016; MKC will likely to increase sales about 4% this year.
Take a look at Campbell Soup. The stock's almost 30% rise this year has been driven by cost cutting. Year to date, operating earnings are up 15% on a 1% decline in organic sales.
At the end of May, Campbell reported fiscal third quarter sales declined 2% to $1.870 billion. Earnings before interest and taxes dropped 5% to $312 million. The only reason earnings per share held up was because of a lower-than-expected tax rate (28.5% vs. 34.5%). The company blamed the mild winter for poor soup sales.
Meanwhile, Campbell's snack food business saw organic sales increase 1% for the year, while operating earnings zoomed up 11% as the company hacked away at expenses.
The real growth engine for Campbell is fresh foods. Its Bolthouse Farms brand saw organic sales decline 2%, but operating earnings grew 30%. Results would have been better if the company didn't run into a carrot shortage that greatly affected results.
For next year, analysts are looking for sales to advance 1.4% to $8.10 billion. Earnings per share are expected to grow 6%, to $3.16 from $2.98.
At $67 a share, Campbell is trading at 21x next year's EPS estimate, which is at the high end of the last three years. I recognize the company is taking a more aggressive approach to cost-cutting and that's driving the stock higher. And while I realize management will lay out its future plans at a July 20 analyst meeting, it was obvious from the third-quarter results that Campbell ran out of costs to cut.
How much more can the company cut without hurting growth? It has already reduced ad spending. What's left?
For me, I would avoid "CAMS," "KASM" and "KASH." There's just not enough top-line growth and their valuations are too high.