Is Campbell’s (CPB) Earnings Beat and Cost-Savings Momentum Enough to Justify a Re-rating?

In the high-debt, low-growth packaged food sector, value investors often face a paradox: companies with robust cash flows but burdened by leverage, and those with aggressive cost-cutting but stagnant revenue growth. Campbell’s Soup Company (CPB) sits at the intersection of these dynamics. Its recent Q2 2025 earnings beat—driven by a 9% sales increase from the Sovos Brands acquisition—has sparked optimism, yet its organic sales declined by 2%, signaling structural challenges in its core snacking business [1]. For value investors, the critical question is whether Campbell’s cost-savings momentum and debt-reduction efforts can justify a re-rating in a sector where margins are under pressure and growth is elusive.

The Earnings Beat: A Mirage or a Signal?

Campbell’s Q2 net sales rose to $2.685 billion, fueled by the Sovos acquisition, but organic sales fell to $2.4 billion, underscoring weak demand in its snacking categories [1]. Adjusted EBIT increased by 2% to $372 million, yet gross profit margins contracted by 100 basis points to 30.4%, reflecting inflationary pressures and supply chain costs [1]. This margin compression contrasts sharply with peers like Unilever, which reported a 280-basis-point gross margin expansion in FY2025 due to input cost deflation and productivity gains [3].

The earnings beat, while positive, appears to hinge on one-off factors rather than sustainable operational improvements. For instance, Campbell’s $737 million in year-to-date operating cash flow and $283 million returned to shareholders via dividends and buybacks are commendable [1]. However, these figures must be weighed against a net debt load of $7.675 billion and a debt-to-EBITDA ratio of 3.7x—well above the sector average of 3.7x for Sealed Air and far exceeding the 0.7x ratio of Smithfield Foods, a company that reported a 96.7% surge in operating profit in Q1 2025 [2].

Cost-Savings Momentum: Progress, But Not Yet Enough

Campbell’s has delivered $65 million in savings through its $250 million cost-cutting program by mid-2025, raising full-year expectations to $120 million [1]. While this progress is notable, it remains modest compared to the scale of its debt burden. For context, Smithfield Foods achieved a 7.9% adjusted operating profit margin in Q1 2025 through segment-specific efficiencies, such as a 14.5% margin in its Packaged Meats division [2]. Campbell’s, meanwhile, has seen its base business gross margin decline by 10 basis points in Q1 2025, with productivity savings only partially offsetting inflation [3].

The company’s strategic shift—divesting non-core brands like Noosa to focus on “Leadership Brands”—is a step toward simplification, but it also highlights the limitations of its asset base. In a sector where General Mills reported a 34.6% gross margin in FY2025 despite input cost inflation [5], Campbell’s margin contraction suggests its cost-savings initiatives are lagging.

Debt Metrics and Re-rating Potential

Campbell’s revised guidance for FY2025 reflects softer demand in snacking and higher interest expenses, which have already dented adjusted EPS by 2% YoY [3]. With a net debt load of $7.675 billion and cash reserves of $829 million, the company’s liquidity position is precarious. While it has repaid $1.15 billion in bonds through refinancing [3], its leverage ratio of 3.7x remains a drag on valuation. By contrast, Simply Good Foods maintained a 13.1% EBITDA growth in Q1 2025 while operating at a 0.8x debt-to-EBITDA ratio [4], illustrating how disciplined leverage management can enhance re-rating potential.

For a re-rating to occur, Campbell’s must demonstrate that its cost-savings program can meaningfully reduce leverage and stabilize margins. The $250 million target by 2027 is ambitious, but even achieving it would only cover a fraction of its debt. Value investors must also consider the sector’s low-growth reality: Unilever’s margin expansion was driven by volume leverage and deflation, not organic growth [3], while Smithfield’s turnaround in hog production was a cyclical rather than structural win [2].

Conclusion: A Tenuous Case for Value

Campbell’s earnings beat and cost-savings progress are positive, but they are insufficient to justify a re-rating in a sector defined by high debt and low growth. The company’s debt metrics remain unattractive, and its margin performance lags peers. While divestitures and focus on core brands may improve efficiency, the path to a valuation upgrade hinges on executing its cost-savings program flawlessly and navigating snacking demand challenges. For value investors, the key takeaway is that Campbell’s offers defensive appeal through its cash flow and brand resilience but lacks the catalysts—such as margin expansion or leverage reduction—to unlock significant upside.

Source:
[1] Campbell's Reports Second Quarter Fiscal 2025 Results [https://www.thecampbellscompany.com/newsroom/press-releases/campbells-reports-second-quarter-fiscal-2025-results/]
[2] Smithfield Foods, Inc. (SFD) Q2 FY2025 earnings call transcript [https://finance.yahoo.com/quote/SFD/earnings/SFD-Q2-2025-earnings_call-340314.html/]
[3] The Campbell's Company (CPB) Q4 FY2025 earnings call [https://finance.yahoo.com/quote/CPB/earnings/CPB-Q4-2025-earnings_call-348554.html]
[4] The Simply Good Foods Company Reports Fiscal First Quarter 2025 [https://thesimplygoodfoodscompany.gcs-web.com/news-releases/news-release-details/simply-good-foods-company-reports-fiscal-first-quarter-2025]
[5] General Mills Reports Fiscal 2025 Fourth-quarter and Full-year Results [https://www.generalmills.com/news/press-releases/general-mills-reports-fiscal-2025-fourth-quarter-and-full-year-results]