Campbell Soup Stock Upgrade: Rao’s Sauce Fuels Positive Outlook

Piper Sandler analyst Michael Lavery has upgraded Campbell Soup Company (CPB) stock to “overweight,” citing the strong performance of its recently acquired Rao’s Homemade brand as a key driver of future growth. This upgrade, coupled with a raised price target, signals a potentially significant upside for investors despite some lingering concerns about potential steel tariffs. Lavery’s optimistic assessment stems from the continued expansion of Rao’s into new markets and the introduction of new product lines, projecting sustained growth despite a recent slight slowdown in sales growth. The analyst believes that the current market undervaluation of CPB presents a compelling entry point for investors.

Key Takeaways:

• Piper Sandler upgrades Campbell Soup (CPB) stock to “overweight,” projecting significant growth potential.
• Rao’s Homemade, acquired through the Sovos Brands acquisition, is the primary driver of this positive outlook.
• Despite a slight slowdown in Rao’s sales growth, further expansion and new product offerings are expected to fuel future gains.
• Concerns exist regarding potential steel tariffs, though Lavery believes these risks are mitigated by existing contracts and domestic steel production.
• The current stock price dip presents a potentially attractive entry point for investors, according to the analyst.

Rao’s Homemade: The Engine of Growth

The core of Lavery’s bullish stance on Campbell Soup rests squarely on the performance of Rao’s Homemade. The acquisition of Sovos Brands, Rao’s parent company, for approximately $2.7 billion earlier this year marked a significant strategic move for Campbell. While Rao’s retail sales growth experienced a slight deceleration in the fiscal first quarter, dropping from 23.9% to 18.7%, Lavery remains convinced that this is merely a temporary blip. He emphasizes the substantial opportunities for continued growth as the brand expands its market reach and introduces new products, particularly within its white sauce category. Lavery’s confidence is further bolstered by the brand’s inherent strength and its already impressive market penetration.

Expanding Market Reach and Product Diversification

Campbell Soup’s strategy hinges on leveraging Rao’s established premium positioning and reputation for high-quality ingredients. Expansion into new geographic markets and retail channels will be crucial to driving future growth. Furthermore, diversifying the product line beyond its core tomato sauce offerings into areas like white sauces opens up significant potential for capturing new customer segments and driving increased sales. The success of these expansion strategies is a key factor in Lavery’s positive outlook. The analyst’s report emphasizes the significant untapped potential for Rao’s to increase its market share and become an even more dominant player in the premium sauce market.

Steel Tariffs: A Potential Headwind?

While Lavery’s outlook is overwhelmingly positive, he acknowledges a potential headwind in the form of steel tariffs, a prospect that looms large under a potential second Trump administration. Campbell Soup uses steel for its soup cans, and steel accounts for around 4% of the company’s cost of goods sold. However, Lavery downplays this risk, emphasizing that Campbell Soup has already secured its 2025 annual steel contract. Furthermore, he points out that “roughly 75% of steel used in the US is produced in the US, which obviously would have no tariffs applied to it, helping mitigate any potential tariff risk from steel.” This strategic foresight, coupled with the currently depressed state of steel prices, significantly reduces the potential impact of any new tariffs.

Mitigating Tariff Risks on Imported Ingredients

A further concern might be tariffs on imported ingredients. While Rao’s tomato sauces are imported from Italy, Lavery remains confident: “While Rao’s tomato sauces are imported from Italy, we continue to expect tariff risk on food to be low.” This assessment likely reflects the existing trade agreements and the relatively low historical imposition of significant food tariffs. Although this remains a potential challenge, Lavery’s analysis suggests that it’s unlikely to significantly derail the positive trajectory of Campbell Soup’s overall growth trajectory.

Analyst Sentiment and Investment Implications

While Lavery’s upgrade is encouraging, it’s important to note that analyst sentiment towards Campbell Soup remains somewhat mixed. Data from LSEG shows that 12 out of 21 analysts rate the stock as a “hold”. However, the average analyst price target still signals a 16% upside potential, indicating a degree of overall optimism. Lavery’s price target of $56 represents a significantly more bullish outlook, suggesting a potential 26.6% upside from Wednesday’s closing price. This divergence in analyst opinions highlights the importance of conducting thorough independent research before making any investment decisions.

Positive Market Positioning

Lavery’s assessment goes beyond simply focusing on Rao’s. He asserts that “We consider CPB one of the better-positioned large cap food names,” indicating that his positive outlook is not solely reliant on the success of a single brand. This broader perspective positions Campbell Soup as a well-managed company with a portfolio of brands adapted to changing market conditions. This assessment reflects the ongoing strength of existing brands and the management’s ability to capitalize on mergers and acquisitions to drive future growth.

A Compelling Investment Opportunity?

The combination of Lavery’s upgrade, the raised price target, and the recent stock price decline of over 10% in the past three months paint a compelling picture for potential investors. Lavery suggests that the current market undervaluation provides a very attractive entry point. However, potential investors should carefully consider the mixed analyst sentiment and the potential, albeit mitigated, risks posed by potential steel tariffs before making any investment decisions. The importance of conducting thorough due diligence and considering personal risk tolerance cannot be overstated.

Ultimately, Lavery’s bullish assessment on Campbell Soup is predominantly fueled by the exceptional performance and significant growth potential of its Rao’s Homemade brand. However, his analysis takes into account other factors contributing to the company’s strong overall position within the food industry and the expected relative mitigation of potential risks. Investors should take time weigh this information along with other research before deciding if Campbell Soup stock aligns with their investment strategies.