Drip Portfolio Report
Wednesday, November 19, 1997
by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Nov. 19, 1997) -- With winter rolling into the less fortunate parts of the country (Chicago, New York, Detroit, Milwaukee, Des Moines, Denver -- you get the idea), the Campbell Soup Co. (NYSE: CPB) is busy brewing extra-large vats of its chicken noodle soup, as well as its chicken gumbo and chicken dumpling (and chicken vegetable, chicken rice, vegetable beef, tomato, and clam chowder -- you get the idea).

The timing couldn't be better -- just as Campbell's soup season is arriving, we're looking at the company's stock. If you serve Campbell's soup with the products of the company that we reviewed yesterday, Anheuser Busch, then you have a full meal. Let's see what the King of Soup has to offer on its own and if we're interested.

Campbell Soup Co. (NYSE: CPB)

Description: Founded in 1869, Campbell is the number one seller of soup, picante sauce, and vegetable juice in North America. More than 75% of all soup sold in the U.S. is Campbell's -- and that's a lot of soup. The company also cooks in spaghetti sauce and baked goods sales.

Major brands: Aside from having the most recognized name in soup, the company owns the brands of Pepperidge Farms (including Goldfish and Milano cookies), Pace picante sauce, Godiva chocolates, Spaghetti Os, Prego, Franco American, and V8 Juice. One of the company's quickly growing divisions is foodservices, which sells potpies to Kentucky Fried Chicken and muffins and buns to a small, little-known company called McDonald's. Campbell is spinning off its less attractive Vlasic pickles business and its Swanson frozen food line (Swanson is terrible stuff -- I tried it once). The company competes with ConAgra and Grand Metropolitan, to name two big guys.

Core money maker: Of its nearly $8 billion in fiscal '97 sales, 51% of revenue came from soup, 20% from biscuits and confectioneries, 6% from the growing foodservice division, and 24% from other (juices, sauces, chocolates).

Financials: Again, because this is an overview we'll only look at a few key things: how is the company priced relative to sales, earnings per share, and the expected growth rate (valuation); what are the current operating and net margins (margins); how much long-term debt does the company have (leverage); and what does management do with the cash that it generates (capital allocation).

Valuation and Growth: At a recent stock price of $52 3/4, Campbell Soup has a $24 billion market cap, so the company trades at three times sales of $8 billion. Let's now find the enterprise value.

Campbell has $26 million in cash and $1.1 billion in long-term debt. Any acquiring company would consider the cash and debt on the balance sheet in its valuation, so we subtract the cash and add the debt to the market cap to get a more accurate value for the company -- the enterprise value. The enterprise value of Campbell is closer to $25 billion and that value to sales is 3.1 ($25 billion / $8 billion sales).

On the net income side, Campbell trades at 27 times trailing earnings of $1.93 per share. The company just announced first quarter '98 earnings on Tuesday, showing earnings per share growth of 16% on a 3% rise in sales. Sales would have climbed 7% if not for (you guessed it) international currencies. Soup sales rose 12% worldwide. The stock trades at 24.8 times fiscal '98 earnings estimates (the fiscal year ends in June) of $2.13 per share and 21.9 times fiscal '99 estimates of $2.42 per share. Over the last five years the company has grown earnings per share 18% annually and the stock has compounded 22%. Campbell Soup is expected to grow 12% annually for the next five years.

Margins: Operating earnings divided by revenue gives us the operating margins. This number shows what the company is earning after the cost of the product and all the costs of running the business are subtracted. It intimates how efficient management is at running the business "operations" -- hence, operating margins. Remember it that way, good Fools.

For the last twelve months, Campbell has averaged 18.6% operating margins, the same as Anheuser Busch, while for comparison Coca-Cola's (NYSE: KO) are 27%. Over the last four quarters operating margins at Campbell have declined with sales, though in the most recent quarter they rose again to 21%. Net margins have been around 9% the past year, though in the last quarter they were 12.5%. For every dollar in sales the company earned over twelve cents in final income, putting it among the strongest of public companies.

Leverage: Long-term debt divided by revenue is one of the most useful ways to think about debt. While doing this, it's important to know why a company has debt. If a company has recently bought new divisions that would add to earnings, the debt would be more acceptable. With $1.1 billion in long-term debt and $8 billion in sales, we have a 13.75% debt-to-sales ratio. This is somewhat neutral. Not great, but not terrible.

Capital allocation: Management pays a moderate 1.4% dividend and has consistently bought back shares. Also, the company is investing in brand growth, international ventures, and is currently increasing advertising expenditures 20%.

The Snapshot for The Soup King:

Ticker: CPB Recent Price: $53 Trailing 12-month sales: $8 billion
Trailing 12-month oper. earnings: $1.1 billion
Trailing 12-month EPS: $1.93

Fiscal '97 EPS estimates: $2.13
Fiscal '98 EPS estimates: $2.42

Enterprise value to sales: 3.1
Current P/E: 27
P/E on 1999 EPS: 21.9
Long-term expected growth rate: 12%
Yield: 1.40%
Campbell Soup Snapshot

Conclusion: Following this overview we conclude that the company is worth keeping an eye on and looking at further, so it doesn't drop off our list. Following the spin-off of weaker divisions, Campbell stands to improve operating margins over the coming years, and with the number one name in soup and an impressive portfolio of other leading foods, the company is certainly one to consider for a long-term DRIP. The debt is in control and a 12% expected growth rate is decent, and hopefully can be exceeded.

We'll continue with our food and drink company research tomorrow, looking at the next company on our list. I think you know it: Coca-Cola (NYSE: KO).

Fool on!

--Jeff Fischer

Attention Web Portfolio Readers: Did you know that by clicking the "portfolios" bar on the right side of the Fool's homepage you can reach the Hall of Portfolios -- a helpful consolidation of all the Fool's portfolios with links and numbers for each port in one area? Yup, you can! This has been a Fool Service Announcement (FSA tm). Fool on!

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Stock   Close    Change
INTC  $79 1/16   + 5/16
JNJ   $63 1/8    + 1/8
              Day    Month     Year    History
Drip         0.20%  (1.07%)    (9.86%)  (9.86%)
S&P 500      0.68%   3.28%     27.52%   (0.71%)
Nasdaq       0.05%   0.48%     24.03%    0.46%  

Last Rec'd    Total #    Security   In At    Current
11/03/97      4.835       INTC     $81.623   $79.063
11/14/97      1.000       JNJ      $60.560   $63.125

Last Rec'd    Total #  Security   In At    Value   Change
 11/03/97      4.835     INTC   $394.69  $382.31  ($12.38)
 11/14/97      1.000     JNJ     $60.56   $63.13    $2.57 

Base:   $900.00
Cash:   $389.75**
Total:  $835.18

GOAL: The portfolio began with $500 on July 28, 1997, 
adds $100 on the 15th of every month, and the goal 
is to grow the port to $150,000 by August of the year 2017. 

**Transactions in progress:

The Drip Portfolio has been divided into 
32.590 shares with an average purchase price
of $24.548 per share.