Campbell Soup Bear's Rebuttal
by Louis Corrigan ([email protected])

Maybe I had an unfair advantage in this Duel because Jeff's thinking about Campbell has been so well rehearsed in the Drip Port reports. But I just don't see anything that new in his Bull take, nothing that would make me want to buy the stock of a consumer-oriented company whose products I (mostly) don't consume.

As I conceded, Campbell's margins growth has been terrific across the board. The company has refocused its efforts on its best businesses. It's raised prices. It's cut costs and may cut them a bit more. Heck, it's even signed up the omnipresent Olsen twins (stars of the new ABC series "Two of a Kind") to promote Campbell's soup to kids.

But at the end of the day, I see a company highly dependent on sales of soups and sauces to a domestic market where growth remains weak. Can lots of marketing dollars and new distribution deals produce souped up results? Maybe, but it's not like Campbell's domestic brand doesn't already dominate, and it's not like Campbell has that much experience in the new delivery systems.

So I see plans for much higher spending that will likely eat into any profit gains from stronger sales, as least in the short run. Overseas, I see lots of opportunity and some smart acquisitions but also huge challenges and more short-term hits from currency issues. Moreover, Coca-Cola has spent decades building up its international business. That's why its brand is synonymous with America and thus with the good life. It's not clear to me that Campbell has much real brand equity outside the U.S.

The issue ultimately returns to valuation. Let's assume Jeff is right and that Campbell can deliver as much as 16% compound growth over the next five years, well above the current consensus estimate of 13%. So the company would report earnings per share of $2.20 for FY99. That would give us a YPEG fair value of $35.20. So Campbell's stock would now stand about 42% above its fair value based on what Jeff grants are possible, though certainly lofty numbers. How much more of a premium does the stock deserve?

There are four factors that make Campbell seem a relatively safe stock in light of general market mayhem and fears of recession. 1) It sells food, a business as recession-proof as you can find. 2) It has limited exposure overseas, with nearly all its sales in economies that look pretty darn good. 3) Its business has never looked stronger for all the reasons Jeff mentioned. 4) Its 1.7% dividend yield makes the stock relatively competitive versus just parking the money in cash.

Personally, though, I would rather buy great companies when they actually look cheap. Campbell simply isn't cheap. In the current market, you can likely find other large cap stocks that can deliver better long-term results than Campbell if you're willing to accept a bit more risk.

More on Campbell: Latest CPB conference call

Next: Cast Your Vote!