Campbell Soup Bull's Pen
by Jeff Fischer ([email protected])
It is estimated that at least one Campbell Soup product is inside 80% of all American households every day. And studies show that the Campbell brand creates more consumer loyalty than any other brand in the country -- even more than Coca-Cola. But the last thing that I need to use to present the bullish Campbell Soup argument is nostalgia. Pulling on heartstrings has little to do with management's unwavering approach to building a great business and, with it, shareholder value. Instead, its approach holds innovation at its heart.
For three months the Fool's real-money Drip Portfolio analyzed 21 companies in the food and beverage industry. The study ranged from Kellogg to Coca-Cola to PepsiCo. After the grueling analysis was complete, Campbell Soup was chosen as the Drip Portfolio's first food and beverage investment.
Why?
Because the company is arguably being the most proactive of all in the industry, doing more to improve its business performance and market presence than any other large, established food and beverage company in America. This is the New Campbell Soup, my friend, and it's "M'mm M'mm Smokin'."
Campbell has spent the last three years slimming down its business to focus on the highest margin, highest-growth divisions, divesting itself of any under-performing assets. After reconfiguring its product portfolio, the company now only sells category-leading brands. The company's coveted brand list now holds only Number One leaders, including Campbell Soup, Pepperidge Farm, Prego and Pace sauces, V8 juice, Swanson, and Godiva Chocolates.
Is Campbell's new focus working?
Despite spinning-off the billion dollar business of Vlasic Foods <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VL)") else Response.Write("(NYSE: VL)") end if %> in fiscal 1998, along with several other divisions and canning operations (in the end, the spin-offs caused sales to decline to $6.6 billion from $7.9 billion in fiscal 1997), the new smaller company actually achieved higher cash flow from operations following the spin-offs ($1.24 billion versus $1.18 billion). And this is just the beginning. Campbell figures it can now increase cash flow from operations 12% to 14% annually, and generate almost $2 billion in free cash flow over the next three years. Nothing is holding it back -- beginning this year, Campbell no longer owns lagging, costly divisions.
So, the new sharp refocus on only leading products is working incredibly well, especially when combined with the other four prongs of Campbell's new but ongoing approach: 1) extensive cost cutting, 2) widely expanding product distribution while increasing advertising, 3) introducing several new products and new ways to sell old products, and 4) continuing aggressive share buybacks.
In fiscal 1998 (ended July), Campbell grew pro forma earnings per share 16% while increasing margins very impressively -- in fact, margins grew more at Campbell this year than at any of the other 20 food and beverage companies we researched in the Drip Port. Campbell's gross margin reached a record 53%, up from 51%, and its operating margin grew to 18.6% from 17.3% the year before, and from much lower levels before that. But the most impressive results arrived in the fourth quarter, as that was the initial period during which most of Campbell's business reconfigurations were complete. The margins were:
Margin Q4 '98 Q4 '97 Gross 53.0% 48.2% Operating 24.5 20.5 Net 14.0 11.3
In fact, in Campbell's largest division (soup and sauces) the company achieved higher operating margins than Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> -- 27.9% compared to Coke's 26.5% last year (and Coke will probably post a lower number this year, while Campbell's is likely to rise again).
Beyond the sale of margin-dragging businesses, Campbell's margin improvements are also due to aggressive cost-cutting. The company will soon complete a program to cut annual costs by $200 million, and management recently stated that it should achieve an additional $150 million in cost-savings in the new fiscal year -- that's additional savings that will show in this year's earnings growth and margins.
As Campbell has increased cash flow from operations, lowered costs, and increased margins, it has also increased its return on assets and its return on invested capital, while its return on equity has leapt. Like a prize fighter, management has trimmed the fat, focused on the actual prize, and is only now beginning to push to grow sales. The company's reconfiguration took a great deal of energy the past three years (like training for a fight) but now Campbell is ready to box. And it knows how.
Pepperidge Farm Goldfish has become the fastest-growing cracker in the United States (and it's going international soon), and Campbell is now introducing several new products and applying the "Goldfish" formula for distribution to them. Some of the new concepts and programs include:
-Campbell's Soup to Go: single-serving microwaveable soup.
-Ready-to-serve Tomato soup: plastic refrigerated containers of the classic.
-Campbell's Simply Home: highest-quality soup in a glass jar.
-Chunky Potato soup: all the rage, having begun at restaurants.
-Soup and Sandwich promotions: with Kraft Foods.
-Goldfish and soda promotions: with Coca-Cola.
Finally, the latest:
-Foodservice sales: focusing on airports, cafeterias and fast food restaurants, Campbell is pushing for extra distribution of soup in these channels as it has successfully done with Wal-Mart and Target stores for its shelved products.
But that's far from all. The company is also introducing new Swanson broths (already the brand is the leader), and is doing promotions on Nickelodeon to increase sales to children. Finally, Campbell recently bought the leading cold fresh soup brand, Stockpot.
With these new initiatives, Campbell will increase advertising substantially, from 4.6% of sales to the 8% level enjoyed by Coca-Cola and Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %>. But due to cost savings, Campbell will continue to buy back 2% of its shares annually (it just announced another $2 billion buyback program through the year 2002), and it will likely continue to increase its dividend payment.
Annual earnings per share growth of 12% to 16% is hoped for the next five years, but analysts currently have (incorrectly in my opinion) conservative estimates for 9% growth this year (perhaps leaving room for an upside surprise). The $52 stock trades at 24 times analysts' fiscal 1999 estimate -- an estimate that represents considerably lower growth than management's guidance for earnings growth in the top-quartile of the industry, or 12% to 14%. Other large-cap leaders such as Coca-Cola and Gillette have failed to grow earnings this year, but Campbell Soup did -- considerably. And international problems will not have much impact on Campbell in the future either, because over 90% of operating earnings are derived in North America.
The company has done everything right to its product line and is now leveraging its brand for growth, with greatly increased distribution, new products, and increased advertising -- all of it financed by cost-cutting so that margins (and share buybacks) will continue to grow. Plus, it's Campbell Soup, baby. The name is as valuable as Coca-Cola in this country.
My worthy opponent, Louis, will probably attack the volume growth of soup and the estimated earnings growth at Campbell. We'll have answers to both, and probably to all of his arguments.
Next: The Bear Argument