Drip
Portfolio Report
Wednesday, January 21, 1998
by Randy Befumo
([email protected])
ALEXANDRIA, VA (Jan. 21, 1998) -- Please note that this week we'll send $50 to both Intel and Johnson & Johnson. We're doing this to meet the January 29 cut-off date for Intel, and the February 7 investment date for J & J. We won't add the $100 in savings to the portfolio until February 1, but we have the cash sitting around anyway, so it's all the same.
Now, what is Campbell Soup Co. (NYSE: CPB) worth? In order to figure
this out, we need to get the most recent
10-Q
filing for Campbell Soup, provided courtesy of Edgar-Online via the World
Wide Web. Quickly glancing through the filing and concentrating on the "Statement
of Earnings," at the bottom we see that as of last quarter Campbell Soup
had 458 million shares outstanding.
Q1 '98 Q1 '97
Weighted average ====== ====== shares outstanding 458 493
(mil) ====== ======Now, long-time readers know that for us here at Drip Portfolio, a company's current price is more than just the current value of its outstanding shares. Because we are looking at the current price an acquirer would have to pay for the company as a whole, we not only want to look at the value of the shares outstanding but the current cash, marketable securities, long-term investments and long-term debt that is on the balance sheet. We call this "enterprise value" or "enterprise price," as opposed to market capitalization (which is the value of the shares multiplied by the number of shares outstanding). For readers who want to read up on enterprise value, check out the December 4th episode of the Drip Portfolio.
Looking at the balance sheet in the 10-Q,
we see the following:Q1 '98 Q1 '97 (numbers in millions) ====== ======
Current assets
Cash and cash equivalents 56 26
... Long-term debt 1,152 1,153
From this, we can calculate the
enterprise value (or price), which is equal to:
Enterprise Value = Market Capitalization + Long-Term Debt- Cash & Equivalents
Enterprise Value = (Shares Out * Share Price) + Long-Term Debt - Cash & Equivalents
Enterprise Value = (458 * $55) + $1,152 - 56
Enterprise Value = $26,268 millionNow, there is only one small adjustment to make. Since this 10-Q was filed on November 2nd, a quick check of the press release archive at www.newsalert.com finds that Campbell Soup has sold $300 million in debt at an interest rate of 6.15% that is due on December 1st, 2002. As the 10-Q was filed before this, the long-term debt on the balance sheet did not reflect this new $300 million in debt sold by the company (at a rate only slightly higher than what you can get on similar Treasury Notes, incidentally). Thus, we should add another $300 million to our enterprise value (price) for Campbell Soup, coming up with $26,568 million as the final total.
Now, to determine the valuation of the new Vlasic-Swanson subsidiary (for lack of a better name, we will refer to it as this, or as "V-S" for short), we need to determine first what the trailing sales and operating profits have been for the company as well as the rate at which these numbers have been growing. Fortunately for us, Campbell Soup issued a pretty good press release back in September when it announced the deal that had these numbers. As stated yesterday, the press release said that as of the end of fiscal 1997, V-S had $1.4 billion in sales, down 1% from the prior year. In addition, we also read that it had $130 million in operating profits over the same period, up from $127 million in the prior year.
Although we could slap a tax-rate on the $130 million in operating profits to get an idea of what net profits will be, we will be cautious about doing this as of yet because we do not know what sort of debt the new company might have -- a critical part to the net profit pie as interest expenses are deducted from operating profits before they are converted into after-tax profits. (For the benefit of readers who might be confused at this point, keep in mind that profit and earnings are synonymous. Thus, operating earnings and operating profits are one in the same.) For right now, because we have a rather large spreadsheet with twenty sample companies at our disposal that we have made over the past few months, we actually have easy access to peer operating profit-to-enterprise value ratios, making these as good for our purposes as the mere price-to-earnings ratios that most analysts would employ. (No sense in making this any harder than it already is.)
Looking at the 10-Q filing again, scrolling down we discover that in the Notes to Financial Statements Campbell Soup included a revenue breakdown from all four of its units. Since the pending spin-off is currently being called the "Specialty Food" unit, we can check and see if revenues or operating profits changed markedly in the first quarter of fiscal 1998. We see from this that year-over-year sales dropped to $323 million from $335 million while earnings before interest and taxes (operating earnings) increased to $27 million from $15 million. Thus, our estimate of sales ($1.4 billion) remains unchanged because $12 million does not alter very much there, but our estimate of operating profits needs to be increased by $12 million to $142 million, given that this is a pretty significant change. In addition, we also discover the total assets of the Specialty Food segment are $942 million, which may also be helpful in determining a value.
To close, what is a reasonable valuation for the new segment? With operating margins of 10.1% and non-existent revenue growth, looking at our spreadsheet the best comparisons are Heinz (NYSE: HNZ), Nabisco (NYSE: NA), Quaker Oat (NYSE: OAT), and Sara Lee (NYSE: SLE). This gives us an enterprise value to sales range of 1.5 to 2.5 and an enterprise value to operating profit (earnings) ratio of 15.0 to 25.0. Given the flat revenue growth, these ranges may be too high so to be totally conservative I want to adjust them down to 0.8 to 1.8 and 10.0 to 20.0 respectively, or about 25% to 40%. With $1.4 billion in sales, the valuation range based on sales is $1.12 billion to $2.52 billion. With $142 million in operating profits, our valuation range is $1.42 billion to $2.84 billion. Thus, the most conservative value for V-S would be $1.12 billion, the most aggressive $2.84 billion and the average $1.98 billion. (Note that these are enterprise values (prices), meaning that any debt that the company takes will have to be subtracted from the total value to get the price of the outstanding shares.) With this in hand, tomorrow we can affix a value on the remaining businesses and see if there is a great disparity.
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