Is it me, or were this morning's results out of Campbell Soup (NYSE: CPB) about as opaque as its creamy mushroom soup? Let's try for some clarity.
For the third quarter, earnings came in at $0.34 a share, up from $0.31 a year ago. Umm, that's good. Then there is a $0.02 gain from a class action settlement. Umm, that's OK. Finally, there is guidance for next quarter of $0.17 a share, down from $0.18 a year ago (though this year's quarter is a week shorter). Umm, good? Not really. That still adds up to growth of just 4% on the year.
CEO Douglas Conant identified the problem: "... we must address the decline in our operating margins." That's right. Operating margins declined from 17.6% to 15.2%.
Problems are clearly evident at North America Soup and Away From Home -- the largest of the company's four segments. Sales declined 4% from last year, and the earnings contribution fell a startling 23%. It gets worse when you consider that promotional spending was actually up.
If you're thinking, "But the company is diversified," consider this: North America Soup accounts for 35% of sales but a full 45% of operating income. Biscuits & Confection and International account for 47% of sales combined but a meager 9.5% of operating earnings. Diversification is there -- but the margins beyond soup are far from yummy.
To be fair, while those 15.2% operating margins are declining at Campbell's, they marginally exceed those at H.J. Heinz (NYSE: HNZ). It's also fair to point out, however, that the 18% margins enjoyed by General Mills (NYSE: GIS) and Kraft (NYSE: KFT) make clear that CEO Conant is right on when he says there are improvements to be made.
Meanwhile, the stock has been something of a laggard, yet trades at 16.5 times 2004 earnings. And while it does yield 2.5% -- in other words, creeping into Motley Fool Income Investor territory -- analysts expect earnings growth of just 6% for fiscal year 2005. Put it all together and Campbell's is lukewarm, at best.
Want to discuss The Art of Fun(ky) BBQ or Recipes and Cooking? Or, how about talking about Campbell Soup or soon-to-report earnings H.J. Heinz? Join in at www.fool.com, where investors can discuss a wide range of topics with other investors.
Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.
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