Drip
Portfolio Report
Wednesday, January 28, 1998
by Randy Befumo
([email protected])
ALEXANDRIA, VA (Jan. 28, 1998) -- Picking up where we left off yesterday, let's take a look at how profitable our four finalists are and how much sales grew in the last quarter and the last year.
Operating Quarterly Annual Margin Sales Sales Campbell Soup 19.02% 7.3% ~9.0%** PepsiCo 17.92%* 3.9% ~3.0% Philip Morris 17.91% 3.9% ~4.4% Quaker Oats 11.15%* 7.5% ~5.7% * -- last quarter annualized instead of last 12 months **-- this is based on the businesses that will remain after the spin-offThe first thing that you notice is that these highly profitable businesses are not necessarily growing all that fast. To be truthful, their situation is much better than the average branded, packaged food company given the current lack of inflation and inability for most companies to put through price increases. In the above list, Campbell Soup, PepsiCo (Frito-Lay) and Philip Morris (tobacco) have all put through price increases in the past 12 months, something very few companies have managed to do. We imagine given Quaker's dominance in the sports drink category that a price increase might be possible, although those operations are plenty profitable as they are and their growth is higher than everyone else save Campbell Soup.
As far as operating efficiency goes, Campbell Soup is the most efficient and has been raising its margins the fastest. The pending divestiture of the Vlasic-Swanson business will effectively push margins to 21.3%, a level which few food companies actually achieve. The company's focus on making smart acquisitions that fit in their core strengths should allow them some room to incrementally improve margins, although getting much higher than 23% or 24% would be a feat.
On the other hand, PepsiCo and Quaker both have plenty of room to improve margins. PepsiCo can get a little more efficient after dumping the restaurants and see margins at around 20%, whereas Quaker has been pouring money into capital expenditures in the form of new plant, property and equipment and should see some benefit out of this. Based on profitability, ability to improve profits and sales growth, in the near-term Campbell Soup is the clear winner although Philip Morris, PepsiCo and Quaker Oats (in that order) are not slouches either.
Return on Return on Equity Invested Capital Campbell Soup 23.47% 37.88% PepsiCo 21.63%* 30.04% Philip Morris 29.22% 31.64% Quaker Oats N/A** 26.13% * -- last quarter annualized instead of last 12 months **-- N/A due to recent write-downs of the Snapple acquisitionLet me stress one thing here -- these are all extraordinarily valuable businesses. Very few businesses create as much capital after investment as these companies. If you were to divide all companies into five tiers, these would easily sit in the top tier of all companies, ever. The slow revenue growth aside, these highly profitable companies generate a lot of money that can go to benefit shareholders in the form of (1) dividends, (2) share repurchases and (3) acquisitions.
Campbell Soup and Philip Morris sit side by side as extraordinarily adept acquirers and share repurchasers. Campbell Soup's aggressive acquisition and divestiture program has cleaned out marginal businesses and added highly profitable business throughout the '90s. Philip Morris has bought a variety of international food brands over the '90s as well, building Kraft into the largest packaged food company in the world. Campbell Soup has committed to repurchase 2% of its outstanding stock every year, while Philip Morris has bought back billions of dollars of stock, ranging from 2% to 6% of the outstanding shares, over the past few years. Both companies pay solid dividends, with the dividend at Philip Morris being extraordinarily generous.
At PepsiCo, the share repurchasing is solid as well. Over the past nine months the company has bought back between 2.0% to 3.0% of its shares. The plans for the free cash that will appear with the divestiture of Tricon Global Restaurants (NYSE: YUM) is to buy back more. On an acquisition front, the company really does not have very many prospects, although we have given it a gold star for the divestiture program. Frankly, against any other competition than Campbell Soup and Philip Morris, PepsiCo would be a shining star. It is kind of like putting Enrico Fermi up against Albert Enstein -- Fermi is a genius, no doubt, but the guy didn't discover relativity.
As for Quaker Oats, they are really a loser in this area. Although new management is untested other than the recent divestiture, we cannot help but be somewhat nervous about the past acquisition program the company has exhibited. Whether it was Fisher Price a decade or two ago or Snapple a few years back, the company has a nasty tendency of buying stupid things rather than buying its shares. A look at the statement of cash-flows shows more shares going out than coming in and we can find no statement by management that any sort of large scale buyback or systematic buyback is in order. Sure, the divestiture of Snapple has moved the shares to near a 52-week high. But here in Drip Portfolio land we demand more, simply because our other investment options offer more. The 10 million share authorization is there and the company may have had to issue more shares than originally planned because of the Snapple divestiture, however, 10 million shares is only about 7.0% of what is outstanding, versus three companies that are buying back 2.0% to 5.0% each year.
Based on intrinsic quality, we would rate Campbell Soup and Philip Morris "high," PepsiCo "moderate to high" and Quaker Oats "moderate." This gives us the following:
Valuation Quality Campbell Soup Moderate to High High PepsiCo Moderate to High Moderate to High Philip Morris Low High Quaker Oats Moderate ModerateWhich company do you think we should pick? Say so on the Drip Portfolio's Drip Companies message board.
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