Ozempic is Killing Food Stocks

Friday was a nasty trading session.

Almost everything was down. A sea of red.

But there was one little green spot on my watchlist. Like a tiny seedling after a forest fire.

It was Campbell’s (CPB). You know, the soup, food, and snacks company.

I’ve been investigating beaten-down consumer staples stocks, like Campbell’s, for a few weeks now.

And over the past week, I did deep dives on General Mills (GIS) and Campbell’s, and decided the latter is more attractive.

Campbell’s owns a bunch of popular food brands:

Today, let’s dig into why Campbell’s is a fascinating stock here.

Real Value, or Value Trap?

At a glance, Campbell’s is dirt cheap. It’s trading at about 9x next year’s earnings. The dividend yield is a juicy 7.2%.

CPB is trading at an extremely cheap price-to-sales ratio of just 0.65x.

But the company just reported earnings, and revenue is down 4% from last year. Additionally, CPB has a lot of debt at $6.9 billion.

Campbell’s is still making a solid profit, but with sales slowing down, investors have trashed the stock. Shares are down 37% over the past year, and 56% over the past 5.

One primary threat to these companies is the rise of GLP-1 drugs like Ozempic and Wegovy.

The Ozempic (GLP-1) Threat

This new GLP-1 class of drug is revolutionizing treatment for diabetes and obesity.

Currently, around 12% of Americans are taking one of these new prescription drugs. That is remarkably fast adoption.

This has been a good thing for many Americans. But it’s been brutal for U.S. food companies. People are eating less overall, and not snacking nearly as much.

This is one of the most interesting negative catalysts I’ve seen hit a whole sector before. It’s like a tidal wave hitting the restaurant and food industry. Whether it will last or not remains to be seen.

But for now, companies like Campbell’s and General Mills have taken a big hit.

Private Labels = Trouble

Another big threat to companies like Campbell’s is the rise of “private label” brands. Most grocery stores have their own competing brands these days.

Costco’s Kirkland has been especially tough to compete with. They see what’s working in Costco, then launch a competing product.

In cases where private labels can get the quality close to leaders, it can be difficult for national brands like Campbell’s to compete.

Combined with the rise of GLP-1s, this makes for a tough environment for classic consumer staples stocks.

The Turnaround Plan

Campbell’s does have a turnaround plan. And much of it depends on an acquisition the company made back in 2023, when they purchased Sovos Brands, parent company of popular Italian food brand Rao’s.

Source: The Campbell’s Company

Campbell’s paid $2.7 billion for Sovos Brands. The market apparently thought that was too rich of a price, and has punished CPB ever since.

Since that acquisition, Campbell’s shares are down almost 50%.

But the silver lining is that Rao’s is the primary driver of growth at Campbell’s today. The company’s flagship pasta sauce is a premium offering that sells for around $8 a jar, but it’s got a cult-like following. And they’ve expanded into frozen foods, pasta, pizza, soups, and more.

Rao’s has built an incredible brand, and it’s really the primary reason I’m interested in Campbell’s. Sure, having Pepperidge Farm and Goldfish is great, but in today’s environment, they’re just struggling to hold onto their market share. Rao’s is still brimming with upside potential.

Elsewhere, Campbell’s is attempting to adjust to changing consumer habits. In chips and other snacks, they’re replacing soybean and cottonseed oil with healthier options like avocado oil. The public is turning against “seed oils”, especially soybean and canola. For decades these oils were sold as “heart healthy” and used in margarines, snacks, and meals. But now research is showing these cheap oils are essentially industrial-grade lubricant.

Is CPB a Buy?

I haven’t made a decision whether to buy Campbell’s yet. But watching this stock get crushed as the market soars brings out my contrarian instincts.

A 7% dividend is juicy enough to get my attention. The dividend looks safe over the short-term, but could get cut if the company’s turnaround efforts fail.

Campbell’s is the kind of cheap stock that could do relatively well if we get a broad market selloff. It’s already been beaten into the dirt, offers a nice dividend, and its products should hold up fairly well in a downturn.

However, the threats to the company are real:

• GLP-1 drugs like Ozempic
• Private label brands like Costco’s Kirkland
• Changing consumer habits

The stock may yet have further to fall. We’ll keep an eye on it and let you know if we see any great entry points.