Drip
Portfolio Report
Tuesday, February 10, 1998
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Feb. 10, 1998) -- You probably hear Campbell Soup mentioned by investors once for every fifty times that you hear Coca-Cola mentioned. In fact, on the Fool message boards there are 665 Coca-Cola (NYSE: KO) posts compared to only 49 posts on Campbell Soup (NYSE: CPB).
But of the twenty-one food and beverage companies that we considered, these two arguably had the strongest operating performance, so it seems that the ratio of "investor excitement to company performance" is highly skewed towards Coca-Cola (and so arguably skewed in our favor). Campbell is much lower on investors' radar screens than is the beverage giant, and the comparative valuations granted the stocks might support this claim. Even though Campbell isn't exactly cheap, Coca-Cola is clearly the most recognized winner.
Going with the most obvious choice (the company with everything going for it and every possibility of continuing, and that everyone recognizes as truly great) doesn't always mean that you're going with the most obvious near-term or even intermediate-term opportunity, though. In fact, the most commonly recognized winners often have much of the valuation inefficiencies squeezed out of them, meaning that in order to continue to outperform, the business needs to continue to beat expectations -- not impossible and even quite likely, but this situation often increases your risk while offering less potential return.
Then there is the flip-side.
Investors frequently have expectations for certain companies that are too low, making the resulting outperformance and appreciation in stock price, when it arrives, that much more significant. I'm thinking of Coca-Cola in the late 1980s. Not many investors had great expectations for the beverage company at the time. Coca-Cola's 30% annualized growth since then is the result of a great management and business, but it is also the result of a combination of factors that were present then, but are not all present now. What is true, though, is that the company is currently stronger than it has ever been, and that fact can't be ignored. The stock price accounts for it, too.
But, importantly then, consider investing in a company that isn't quite there yet.
When a potential investor looks closely at Campbell Soup right now -- the business, the valuation, the recent and ongoing initiatives, and the possibilities -- he or she should see something quite familiar. They'll begin to understand it, and nod. And then this potential investor might even crack a smile.
Campbell Soup is in a position that is similar to Coca-Cola in the late 1980s. Though by now Campbell is actually in a time period equivalent to Coca-Cola in the early 1990s, Campbell is still years away from reaching the global consumer brand status of Coca-Cola and of achieving the stock price recognition that can coincide with that. Campbell is only now entering its second large phase of improvement, and the possibility for substantial growth, internationally and domestically, is unquestioned -- business growth, that is. The possibility for growth in shareholder value due to a number of factors is just as interesting, if not more so.
So what's the story?
In 1990, after ongoing lackluster performance, Campbell hired David Johnson as CEO, the man responsible for the strong turnaround at Gerber. Mr. Johnson saw an opportunity to build Campbell Soup into a consumer power unmatched by any in its class, and the redirection began immediately. The early initiatives include a focus on distribution growth along with cost cutting, brand building, new products, and share repurchases. Does that list sound simple? There's much more. And for a company with 37,000 employees and billions in sales, these things take time, and we're glad that they take time. I think that we're beginning to invest relatively early in Campbell's bid to become one of the truly great consumer brand companies and -- what has often been lacking with Campbell -- one of the truly great consumer brand investments.
Why am I so interested in buying Campbell? What is the company doing? How similar is the situation to past situations at Coca-Cola and other consumer giants like Gillette? Tomorrow we'll cover several facts about Campbell and its business in detail. For now, I promised the launching of a contest today -- a battle of share price appreciation, with the gladiators being Campbell Soup and Coca-Cola. Which stock will win over the next five and ten years?
Campbell Soup has outperformed Coca-Cola since Jan 1, 1996 (and it outperformed both Gillette and Coca-Cola last year as well), and I think that Campbell has the potential to outperform Coca-Cola (we'll just focus on that company) over the next five and ten years, too. Beginning at an enterprise value-to-sales ratio of 3.1 versus Coca-Cola at nearly 9 is only one factor, though where an investment begins is of course important to overall returns. The many other factors include where Campbell's business stands right now in relation to Coca-Cola's, as well as the general market's awareness of Campbell's initiatives in comparison to the awareness of Coca-Cola.
So... let the games begin! As I type this, Coca-Cola is trading slightly above $68 per share and Campbell is at $54 5/8. After the market closes I'll print the numbers here for the record and we'll start the competition. Don't expect daily updates, of course. We'll look at the share prices every six months or so, as we review the respective businesses.
Tomorrow, reasons why the Campbell Soup Company has the Drip Port and me so interested.
--Jeff Fischer
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