Monday, January 11, 1999
DJIA 9571.75 -71.57 (-0.74%) S&P 500 1261.94 -13.15 (-1.03%) Nasdaq 2354.91 +10.50 (+0.45%) Value Line Index 949.80 -3.24 (-0.34%) 30-Year Bond 99 4/32 -15/32 5.31% Yield

An Investment Opinion
by Warren Gump

Heat Cools Soup Sales

Earlier this morning, like a burst of frigid weather that a few people were anticipating, Campbell Soup (NYSE: CPB) warned that earnings per share (EPS) for fiscal 1999 (ending July) would likely be $0.18 to $0.23 below the First Call consensus estimate of $2.13. This roughly 10% shortfall means that EPS for the year will be flat to up slightly from last year's earnings of $1.90 per share. The stock fell $6 1/4 to $46 at midday, hitting a new 52-week low. The explanation for this shortfall is a "supply chain initiative" that management expects to save $100 million per year.

While this morning's press release was short on details, one can only assume that the company is attempting to reduce bloated store-level inventories. Factors causing this inventory buildup are warmer than usual weather that has hampered sales of canned soup overall, encroachment from private label (store brand) products, as well as Campbell's shipping more soup than it sold in prior quarters. The weather issue is negligible to long-term investors. Some years will be warm, some will be cold, but it will all average out over time. The other issues are of more consequence.

For the four-week period ending December 6, Information Resources data indicated that canned soup volume sales fell 2.6%. Campbell's soup was slightly below this level at down 3%, while private label brands increased 7%. This data indicates that an increasing number of consumers were willing to switch from Campbell's to less-expensive store brands. Disappointingly for Campbell shareholders, this store brand strength comes as the company has juiced up its advertising and promotion budget. Although Q1 soup and sauces sales increased 6%, consumer and trade promotion increased in the double digits. Campbell must address this issue in the years ahead to ensure that consumers reach for the distinctive red & white label.

Excluding weather and the private label issues, some analysts had warned of concerns that Campbell was shipping more product than it was selling. In Q1, soup shipments rose 4% while actual sales were only 3%. According to CFO Basil Anderson at the time, "If consumption is very strong, we're not going to spend any time worrying about inventories." Well, consumption is weaker and inventories did become a problem. Given the strength of its brands (Pepperidge Farm, Godiva, Prego, and Pace in addition to its namesake), my guess is that Campbell will do just fine over the long term. The news will not always be positive. Disappointments and challenges will develop. Successful handling of this type of adversity is what makes great management teams and companies.


Online portal company Yahoo! (Nasdaq: YHOO) screamed ahead $38 7/8 to $382 1/2 after it announced a deal with IBM (NYSE: IBM) to offer Yahoo Internet services on IBM's new Aptiva PC line. The PCs connect to both Yahoo!'s Web directory capabilities (www.yahoo.com) and personalized web pages.

Computer networking equipment company Ascend Communications (Nasdaq: ASND) rose $3 1/4 to $74 11/16 following reports in The Financial Times that telecommunications equipment maker Lucent Technologies (NYSE: LU) is in talks to acquire Ascend for more than $16 billion. Both companies have declined comment but reported other news this morning: Ascend plans to sell the enterprise computer assets of Stratus Computer to investment group Investcorp, while Lucent said it will buy privately held third-party billing software company Kenan Systems for $1.48 billion in stock. Lucent lost $3 1/8 to $112 1/8 this morning.

Online services company America Online (NYSE: AOL) won $9 3/8 to $155 7/8 as Merrill Lynch reiterated a near-term "buy" rating, setting a 12-month price target of $195 per share. BT Alex. Brown, meanwhile, reiterated a "strong buy" rating on the stock, setting a $180 target.

Online brokerage E*Trade (Nasdaq: EGRP) rose $8 7/8 to $76 1/2 after reporting a fiscal Q1 loss of $0.23 per share, ahead of First Call's projected $0.30 per share loss. The company said total active accounts were more than double the total from last year's quarter at 676,000, while transactions for the quarter hit 2.8 million, 75% higher than a year ago.

Streaming media aggregator Broadcast.com (Nasdaq: BCST) streamed ahead $54 1/2 to $252 after the company announced plans for a two-for-one stock split effective Feb. 11.

Automaker General Motors (NYSE: GM) drove ahead $6 1/2 to $86 9/16 after J.P. Morgan reiterated a "buy" rating on the stock, setting a 12-month price target of $95 a share.

Specialty gifts retailer Sharper Image Corp. (Nasdaq: SHRP) jumped $7 9/16 to $19 15/16 after it said it will add auction capabilities to its online sales site. Sharper Image stock has raced ahead recently following news of rapidly growing online sales during the holiday season. The auction site is expected to launch next month.

Tobacco giant British American Tobacco Plc (NYSE: BTI) smoked up $2 11/16 to $20 5/8 after it said it will acquire Rothmans International SA from Switzerland's Compagnie Financiere Richemont AG and South Africa's Rembrandt Group Ltd. in a stock swap valued at 4.6 billion pounds, about $7.5 billion.

Technology consulting services provider SPR Inc. (Nasdaq: SPRI) sprung up $2 11/16 to $20 1/2 on news that information technology and staffing services provider Metamor Worldwide (Nasdaq: MMWW) will buy the company in a $313 million stock deal valuing SPR at around $22.80 per share, about a 28% premium to Friday's closing price. Metamor lost $1 9/16 to $26 15/16.

Vacation rental and properties management company ResortQuest International (NYSE: RZT) improved $1 15/16 to $17 1/16 after announcing the debut of an Internet-based booking service for its rental homes and condominiums.

Component and supplier management software provider International Computex (Nasdaq: ICIQ) grabbed $2 1/16 to $8 9/16 after it said a subsidiary of privately owned Information Handling Services will buy the company for $9.50 per share in cash, a 46% premium over Friday's closing price.

Computer network directory and messaging products company Banyan Systems (Nasdaq: BNYN) spread $2 1/16 to $16 1/2 after it announced a networking and Internet alliance with Microsoft (Nasdaq: MSFT). The deal will give Banyan $10 million over three years for training, marketing, and product development. Microsoft will also acquire warrants representing a 7.5% share in Banyan.

Entertainment retailer Musicland Stores (NYSE: MLG) spun ahead $1 5/16 to $13 15/16 after it said it plans to open several e-commerce sites in the second quarter incorporating the brand names of all its chain stores: Sam Goody, Suncoast Motion Picture Company, Media Play and On Cue.

North Carolina bank holding company Centura Banks (NYSE: CBC) deposited a gain of $1 11/16 to $73 3/16 after reporting Q4 EPS of $0.93, a penny shy of First Call's nine-analyst consensus estimate but ahead of last year's $0.89 mark.


International telecommunications carrier Pacific Gateway Exchange (Nasdaq: PGEX) sank $16 7/16 to $29 1/4 after saying higher fixed costs and slower-than-expected growth in Japan, France, and Germany will result in Q4 EPS $0.06 to $0.08 below the $0.32 First Call mean estimate. EPS for 1999 is also expected to miss estimates "by less than 20%." At least five Wall Street firms lowered their ratings on the company this morning. Fellow international carrier, IDT Corp. (Nasdaq: IDTC) fell $3 to $14 7/8 on a downgrade to "hold" from "strong buy" by Credit Suisse First Boston.

Luxury goods maker Gucci Group NV (NYSE: GUC) dropped $5 to $69 7/8 after Credit Suisse First Boston lowered its rating to "hold" from "buy" following the stock's 54% rise last week. Today, the vogue is that fellow high-end products maker LVMH Moet Hennessy Louis Vuitton (Nasdaq: LVMHY) will not announce a full-scale merger with Gucci in the next few days, as some had anticipated, and will opt instead for a substantial minority stake.

Food and consumer products company Sara Lee Corp. (NYSE: SLE) slid $1 1/4 to $25 7/16 after Goldman Sachs took the company off its "recommend list" and lowered its rating to "market perform," citing concerns about a slowdown in earnings growth.

Implantable cancer radiation treatment devices maker Theragenics Corp. (NYSE: TGX) was knocked down $4 15/16 to $10 3/8 after reporting fiscal Q4 EPS of $0.11, flat with last year's results and $0.02 shy of the Zacks mean estimate. Sales were soft in the quarter as the firm experienced excess capacity and transitioned its marketing efforts to its partner Indigo Medical, a unit of Johnson & Johnson (NYSE: JNJ).

The American depositary shares of Chilean supermarket operator Distribucion y Servico D&S S.A. (NYSE: DYS) were marked down $1 11/16 to $10 1/16 this morning after the company said lower revenues due to the economic slowdown in its home country will result in fiscal 1998 earnings between $0.37 and $0.39 per ADR, missing the First Call mean estimate of $0.61 per ADR.

Fingerprint identification systems designer Identix Inc. (AMEX: IDX) was framed with a $1 9/16 loss to $8 11/16 after saying delayed timing of certain orders and the repositioning of its biometric security products will result in sequentially lower revenues and earnings in fiscal Q2. In Q1, the company earned $0.02 per share on $20.8 million in revenues.

Electronic components and electrical switching devices maker Technitrol Inc. (NYSE: TNL) was zapped $1 1/4 to $29 1/4 after CEO Thomas Flakoll resigned. Flakoll will be replaced by Chairman James Papada on an interim basis. On a brighter note, Technitrol also said the First Call mean earnings estimates of $0.49 per share for Q4 and $2.05 per share for fiscal 1998 are "reasonable."


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