ALEXANDRIA, VA (Jan. 22, 1998) -- Yesterday, we determined that the current enterprise value (price) of Campbell Soup Co. (NYSE: CPB) was $26,568 million (or $26.6 billion, for math purists). We also looked at the upcoming Vlasic-Swanson (V-S) spin-off and determined that a reasonable valuation range was somewhere between $1.12 billion and $2.84 billion, with the mean valuation coming in somewhere around $1.98 billion. Today, we simply need to determine what sort of value we think that the remaining businesses of Campbell Soup offers, less the value of any recent acquisitions (as discussed Tuesday). With these three numbers in hand, we will be able to determine how compelling the shares of Campbell Soup currently look.
Figuring out the sales and operating earnings for the rest of Campbell Soup is fortunately an easy task. We just need to subtract the sales and operating earnings of the V-S subsidiary from the sales and operating earnings of the whole company. Yesterday, we determined that sales for V-S were $1.4 billion and operating earnings were $142 million. Looking at the most recent 10-Q and 10-K for Campbell Soup, we can see that net sales for fiscal 1997 were $7,964 million and earnings before interest and taxes (operating earnings) were $1,266 million. In the first quarter, sales rose $68 million to $2,120 million while operating earnings rose increased $262 million to $451 million. If we simply add the net change in the first quarter of fiscal 1998 to the fiscal 1997 totals, we have the totals for the last 12 months. Thus, revenues have been $8,032 million and operating earnings have been $1,528 million.
With overall operating margins at 19.02% and operating margins at the V-S unit at only 10.1%, we can see that with that business gone, operating margins will increase. We can actually quantify this increase by subtracting the V-S revenues and operating earnings from the Campbell Soup Co. totals. If Campbell Soup had $8,032 million in sales and $1,528 million in operating earnings while V-S had $1,400 million in sales and $142 million in operating earnings, the remaining company will have $6,504 million and $1,386 million. Taking operating earnings of $1,386 million and dividing it by sales of $6,504 million gives us operating margins of 21.3%, a nice 2.3% increase for dumping some lower margin, slower growth businesses. For students of comparative valuation, this would give Campbell Soup margins that are second only to Coca-Cola (NYSE: KO) (26.3%) and Tootsie Roll (NYSE: TR) (23.7%) and definitely put them well above norms for all companies.
Seeing the remaining businesses valued in a range of 3.5 to 4.5 times sales and 18 to 25 times operating earnings seems reasonable given where peer companies are trading, particularly given the fact that the remaining businesses have shown 10% revenue growth -- rare in the food category in this time of flat inflation. This would put a fair Campbell Soup valuation somewhere between $22.8 billion to $29.3 billion based on sales and $25.0 billion to $33.3 billion on operating earnings. This all averages out to around $28.1 billion, or slighly better than the $26.6 billion billion the combined company gets today. Adding only $1.1 billion for V-S you get $29.2 billion, a 9.8% improvement. Should Campbell Soup acheive this price in 12 months, the total return would be 11.3%, as the company pays a 1.5% dividend. In fact, one might even argue that the 2% of shares it would repurchase in the fiscal year (its commitment to repurchase each year) might increase this slightly to 12.0% to 13.0%. Investors should keep in mind that this includes the effect of the "V-S" spin-off, meaning that to get this return you would have to own both parts.
In conclusion, while Campbell Soup is far from dramatically undervalued, the pending spin-off combined with the company's successful acquisition/divestiture program and its commitment to repurchase 2% of the outstanding shares per year make for a compelling long-term Drip Portfolio opportunity. Although we have yet to look at Quaker Oat (NYSE: OAT), which we will do early next week, Campbell Soup offers less political uncertainty than Philip Morris (NYSE: MO) and more evidence of high-quality management going in the right direction than PepsiCo (NYSE: PEP). While the total return might be lower and you would have to deal with the V-S unit (unless you waited until after the spinoff to begin to purchase Campbell stock, sacrificing some possible value though not anything meaningful for Drip investors just beginning), the non-valuation risk (management, external legislative issues, etc.) is also slightly lower, balancing the positive/negative see-saw.