Drip
Portfolio Report
Monday, February 9, 1998
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Feb. 9, 1998) -- Today we'll review our thinking on the Campbell Soup Co. (NYSE: CPB), our third buy, because there have been questions on the message boards regarding our delayed purchase. The main query has been whether to begin buying the stock now, or to instead wait until after the Vlasic Foods spin-off. To answer, the Drip Port is waiting until the spin-off is complete, which the company hopes to accomplish by March 30. The record date of the spin-off will be announced in late February following a meeting of the board of directors.
There are a few reasons why the Drip Port is waiting to buy Campbell, including:
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We only want to own Campbell Soup, the business with higher margins, not fractional shares in the new business as well. The reason Campbell is spinning off eight food divisions that will form the new Vlasic Foods International Co., is to focus on its core, higher margin business. Key initiatives in that core business include growth of sales in international markets. In 1997, 87% of operating earnings at Campbell came from U.S. sales. It has mucho, mucho room to grow in Europe and elsewhere, and soup, confectioneries and sauces are the way to grow.
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With $1.1 billion in long-term debt, it's very feasible that Campbell will spin-off some of the debt to Vlasic Foods. Ideally for us, it will give a decent amount of its debt to Vlasic ("give" is a kind word for such a transaction). This might be another reason (though not major) to avoid the new shares.
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Paperwork: why buy Campbell now and guarantee ourselves (and the company) the tedious paperwork? We would have to sell our fractional shares of Vlasic Foods (unless we decided to keep them and invest in the company) at an expense to both us and probably Vlasic. The extra paperwork wouldn't be horrible, but why create it?
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Primarily, though, circling back to reason number one, the food company we chose to buy was Campbell Soup due to the strength of its core business (soups and confectioneries constituted over 70% of sales last year). As we're investing a modest $100 per month, we want to send the money to only the best places possible. After all, investors only get one chance to spin the big wheel, one life to invest. We understand Campbell and see it as a strong business in which to invest, while Vlasic Foods probably won't have the margins or growth rates to attract us. And finally, as Fool "Sandeep" wrote on the Web board, if you send money to Campbell now, you're effectively only sending a portion of that money to Campbell, because a small amount of it would actually result in Vlasic shares.
For the coming years, Campbell and Campbell alone is the food company that we'll be investing in, unless we add another food stock to our repertoire -- something which we may or may not do at some point. One possibility -- the one that is suggested most frequently and that many Fools already own -- is Coca-Cola (NYSE: KO). Of the twenty-one food companies that we considered, Campbell Soup and Coca-Cola arguably had the strongest operating results for the recent past. So, before we continue with our in-depth look at Intel (Nasdaq: INTC), tomorrow we're going to begin tracking a contest between Coca-Cola stock and Campbell Soup stock. (Hey, if we're online doing this portfolio for years, we might as well have as much fun as possible, including somewhat childish competitions between stocks.)
Tomorrow I'll lay out some reasons why Campbell Soup might be able to outperform Coca-Cola over, say, the next decade, and we'll launch the contest between the two share prices with the breaking of a bottle of champagne over my monitor. (Sorry, you must be present to have a drink.) I'll provide my own twisted logic and the context behind the Coca-Cola-beating possibility, as I see it. It won't be a magical explanation, though. When you boil investing down to what it really is, you're left with numbers. What you're aiming to do is compound numbers for yourself.
Finally, in the news on the Web today, Campbell announced its largest advertising initiative in its history, with a new ad campaign that launched during the Olympics. Also, we should have bought our $50 worth of Johnson & Johnson (NYSE: JNJ) today.
See you tomorrow, when once again we open the floor for debate on Coca-Cola -- just for a day here in the column, but for who knows how long on the message board. Maybe for a day, or maybe not even for an hour, or maybe for a week.
Fool on!
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