Campbell's Earnings Turnaround No Duck Soup (News) September 2, 1999

Campbell's Earnings Turnaround No Duck Soup

By Brian Graney (TMF Panic)
September 2, 1999

Shares of supermarket soup-erstar Campbell Soup Co. (NYSE: CPB) were watered down a bit this morning after the company reported its fiscal fourth quarter results. Net income from continuing operations for the quarter fell 30% from a year ago to $121 million, resulting in EPS of $0.28 (excluding restructuring charges). That was in line with an unexpected earnings warning from the company in June. Total sales in the period were flat year-over-year, or up 4% if the impact of currency fluctuations and divestitures are backed out. President and CEO Dale Morrison called the results "disappointing" and promised that better days are just down the next shopping aisle.

Perhaps the best news for Campbell shareholders was what the earnings press release didn't say -- namely, there were no new surprises to digest. With the company's shares down 22% so far this year as retailers trim soup inventories, investors have had their fill of bad news. "Fiscal 1999 has been a difficult year of transition,'' Morrison understated. The company expects its revamped supply chain system, new product innovations, and $150 million in cost savings from this past year to translate into higher returns in fiscal 2000 and beyond.

Currently, analysts surveyed by First Call are expecting the soup king to bounce back with higher year-over-year earnings in the next four quarters, resulting in EPS of $1.93. That would represent 12% earnings growth from this year $1.72 -- enough to put the company within reach of its goal of growing earnings consistently within "the top quartile" of its food and beverage peers.

At $43 per share, Campbell is trading at 25 times trailing earnings, 22.3 times next year's earnings, and 2.9 times trailing sales. Believe it or not, that's basically unchanged from where the company was two years ago, when Campbell's future growth rate was being modeled by many analysts in the much higher 15% to 17% range. At that time, the company was licking its chops at the prospects of lower production costs, advertising blitz-induced revenue gains, and aggressive, EPS-boosting share buybacks. As today's results showed, the higher earnings haven't panned out.

Investors are now left to wonder whether the company is ever going to be able to turn up the heat and deliver the kind of growth that was expected back in 1997. The company is much leaner than it was then, with 15% less in total assets on its balance sheet. Under its more leveraged financing structure, long-term debt has been increased by 15% and shareholders' equity has declined a whopping 83% to a scant $235 million. So far, the effects on the income statement have been minimal. Judging from the company's valuation resiliency, investors may want to let Campbell's simmer for a few quarters and show some earnings growth consistency before chowing down on the stock.

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