ALEXANDRIA, VA (Jan. 23, 1998) -- After Randy did all of the hard work, I get to complete the simple task of reviewing the week. The past three days of this holiday-shortened week were spent on Campbell Soup (NYSE: CPB). Randy completed his in-depth look at the company, focusing on the coming spinoff of lower margin divisions because we're already cognizant of the strong management and market leadership at the company. That's obvious. In fact, all of the companies on our finalist list are market leaders, but Campbell is one of the few food businesses we've considered that controls over 80% of its primary market (like Intel). Another company close to doing so is Quaker Oats (NYSE: OAT), with 66% of the hot cereal market and 80% of the sports beverage market. Randy will be looking at Quaker next week.
With a handful of great companies to choose from, the management, the business, and the valuation all need to be considered together to determine what we think will be the best investment. There is no simple investing matrix that spits out an answer; there are many levels on which to base decisions. In the end, the quality of the business and the price that you pay for it determines how the investment performs. Pretty straightforward. Valuation + Business performance = Stock performance.
Tuesday Randy talked about the ability of management at Campbell to consistently buy food divisions (often using debt) that increase value at the company while spinning off weaker divisions; then he introduced the current situation regarding the company's Swanson and Vlasic divisions. Wednesday the column looked at the current value of Campbell and began to break it apart to see how the divisions were valued separately. Thursday it was concluded that the company offers reasonable value alongside a pretty exceptional business, one that promises to improve even further (at least in operating margins) following the spinoff. Compared to PepsiCo (NYSE: PEP), the odds of improvement and the valuation are more favorable, while Philip Morris (NYSE: MO) has many more questions surrounding it and, as a result, a much lower valuation (and a great dividend yield).
Readers on the message boards and in email have talked about the management's drive at Campbell to increase shareholder value, comparing it to the drive at the Coca-Cola Co. (NYSE: KO). The annual 2% stock buyback plan that Randy mentioned is a great example. Out of curiousity, though, I wonder how much of the "good feeling" of investors comes merely from a favorable impression of company products, which is then rightly or wrongly translated into "a management that cares." Management at Philip Morris, in contrast, has a track record for building value that most companies can't match, but you won't hear anyone praise them for it except people who like to smoke. The two issues are separate, though: a company is either building value or it isn't.
We mentioned early this week that we're sending $50 to both Intel and Johnson & Johnson. That money was mailed Friday the 23rd. The investment deadline for Intel is January 29, while J&J makes its next investment on February 7. We'll be early for a change! We'll add our $100 in savings to the portfolio on February 1.
Finally, this week Johnson & Johnson reported fourth quarter results (Web link). As with Intel, we'll look closely at them after the Food Olympics is completed. Earnings per share rose 13.8% for the year on about a 5% increase in sales (currency woes took a bite out of sales growth, as volume increased more than 5%). The stock made a new all-time high this week -- high in stock price, though not necessarily all that high in valuation, thankfully. Not cheap, but not dear. Just drippy.
Next week we have Quaker Oats and a discussion toward a final decision -- a possible victor in the Fool Olympics. Please note that on the top right of this portfolio page are links to both the "Drip Company" message board and the "Drip Basics" board. If you have any thoughts to share (and we hope you do), we'll see you there. Have a great weekend.