Campbell Soup Bull's Rebuttal
by Jeff Fischer ([email protected])

Louis did a fine job summarizing many of the great points of Campbell, so let's address his few relatively minor bearish points.

First, the valuation. Campbell is set to grow at a rate nearly 85% higher than the S&P 500 (13% versus an estimated 7% for the S&P), and yet it trades at a discount to the S&P (24x this year's estimates and 21 times next year's, versus over 25 and 23 for the S&P) while Campbell has one of the strongest brand names on the market, second only to Coca-Cola (and second to none when it comes to brand loyalty).

Second, YPEG and PEG measures are for guidance only, and earnings growth alone doesn't value a company. Plus, Campbell is far too large for the PEG measure. As for its YPEG valuation, this company (due to its safety and dominance) arguably deserves close to a 2x YPEG premium. So, Louis's YPEG value of $31 x 2 = $62. At a current price of $52, the stock trades at a 19% discount to this. A $62 price would put Campbell at 26 times next year's estimates, while the company could grow earnings per share over 15%. A forward P/E of 26 is an aggressive but not obscene premium. But cash flow matters more than earnings, as does enterprise value. Would you buy Campbell's entire business for the current price of $24 billion, or 3.8 times sales? What is the value of brand name alone? It's said that Coke's brand name is worth $50 billion. Is it? Plus, that stock is at 8 times sales.

Next, Louis said that other giant consumer stocks are falling and Campbell is likely to follow suit. However, the opposite has been happening. Despite owning the leading soup brands in France and Germany, and achieving double-digit sales growth in almost all of its international markets (Australia, Japan, China, Europe, Mexico) except for Canada, Campbell still derives over 90% of operating earnings domestically. So while weak world economies harm other large brands, Campbell's business continues to cook. The market recognizes this. Dollars seem to be leaving other companies with slow or even negative earnings growth and chasing the relative safety of Campbell. Campbell's stock has held steady and even gained since the stock market's July peak and steep decline.

Louis next addressed volume growth. Campbell achieved 4% worldwide volume growth last year. This is actually very good considering that management wasn't particularly focused on growing volume. The company was primarily focused on trimming its non-core businesses. Only now can management focus on growing and -- as we just showed -- it will. New products, advertising and distribution are the rally cries now that the Campbell house is finally in order. With double-digit growth in international markets and a renewed focus on different and new U.S. markets, it's most likely that volume will grow considerably more now than in the past. Management aims for 6% volume growth. Sales growth would be notably higher.

Second to last, I enjoyed how Louis presented the argument for the "away-from-home" market as being the fastest-growing, and than wrote how that is exactly the market that Campbell is addressing. I thought he'd taken the Bull side for a moment! That is, until he tried to write-off the entire initiative by saying that it'll be costly and it represents a jump into retail, which could be distracting. But, as Louis will concede, you need to spend in order to grow. Plus, Campbell's Godiva retail outlets have consistently achieved double-digit same-store sales growth -- no small feat -- proving the company knows the retail market. Campbell has developed whole new business divisions to address this market, and to address the beverage market, too (with worldwide possibilities for V8).

Lastly, the stock has gained 117% while earnings grew 36% the last three years because the market recognizes and appreciates smart business moves, cost-cutting, and sharply rising margins. This is precisely the situation that Coca-Cola was in ten years ago, when Buffett did buy. That stock has appreciated almost 10x its earnings growth because its profitability ratios improved so much during Coca-Cola's "restructuring."

Now Campbell has been doing the restructuring. In fact, Buffett would have been smart to have bought some Campbell three years ago, or even two years ago. The stock has risen more than three times its rate of earnings growth due to ongoing business improvements, while Coca-Cola's stock has been flat for almost two years (while the S&P gained nearly 30%). The stronger margins at Campbell called for a P/E multiple expansion. Investors Foolish enough to catch this ride benefited (and might continue to do so) from not only higher earnings growth, but the market's willingness to grant Campbell a higher multiple (like Coke or Gillette) due to strong business improvement.

Campbell is still very new in its period of redirection and international expansion, both of which represent strong long-term opportunities. For a relatively inflation-safe and defensive investment whatever world economies do, it's hard to beat Campbell at this price (which isn't screaming cheap, I agree, but is low enough to be defensive and offer plenty of long-term upside). The company's exciting new initiatives are only in infancy, while its age-old brand carries tremendous value.

Next: The Bear Responds