Campbell's Earnings
And Touchstone Friday
by Jeff Fischer (

ALEXANDRIA, VA (September 4, 1998) --Despite reporting strong operating results and earnings for fiscal 1998, Campbell Soup (NYSE: CPB) has declined on word that earnings growth for the first half of fiscal 1999 will not likely be as high as in the past. The company is increasing its spending on new products and initiatives in order to fund future growth. However, the second half of the year should pick up any slack from the first half, and the company expects to continue to grow earnings per share in the top quartile of all companies of its industry, as it has for the past eight years running.

What's most important to long-term investors is the strength of the business overall. And that is improving by leaps and bounds. Margins at the company are stronger than they've ever been, and they promise to grow even stronger. Plus, this year Campbell has all but finished spinning-off lower-margin businesses and margin-dragging operations (such as canning assets) in order to focus on top-line and margin growth. With its strongest product line ever now in place (constituted of all leading brands), Campbell is ready to focus on growing volume while continuing to cut costs. Its $200 million goal of cost-savings is being met, and an additional $150 million in savings will show in the 1999 numbers, further improving margins.

As explained in our investment criteria, the Drip Port searches for companies possessing market-beating earnings and sales growth rates that are sustainable, improving margins, increased share buybacks, and growing dividend payments, among other factors. All of these factors are being met -- especially these factors -- with flying colors at Campbell Soup. We could ask for higher sales growth, but otherwise Campbell has been the poster child for success in all of these criteria.

Consider the company's margin improvement over the past year.

 Margin      1998    1997 
 Gross       51.7%   48.4% 
 Operating   18.6    17.3 
 Net         10.2     9.5
The more telling figures are from the fourth quarter, however -- after the company had completed still more spin-offs in order to focus on higher margin sales. The fourth quarter represents the highest margins achieved by Campbell to date. Witness:
 Margin      Q4 '98    Q4 '97 
 Gross        53.0%     48.2% 
 Operating    24.5      20.5 
 Net          14.0      11.3

In other business arenas, the company actually increased its absolute cash flow from operations despite now being a smaller business (due to spin-offs and divestitures) when compared to last year. And its dividend and sharecount both went in the direction that we favor -- that is, its dividend payment per share increased, and its sharecount decreased.

             1998   1997 
 Dividend:  $.823  $.750   +9.7% 
 Sharecount: 460m   478m   -3.7%
By product division:

Soup and sauce sales increased 6% to $4.43 billion, while operating earnings grew 10% to $1.24 billion. In this division -- which is Campbell's largest -- the company achieved operating margins of 27.99%, topping Coca-Cola's (NYSE: KO) 1997 operating margin of 26.5%.

Biscuit and confectionery sales in fiscal 1998 were $1.52 billion, up 5% before the impact of currencies, down 2% after. Operating earnings in this division increased 12% to $231 million, and 18% prior to the impact of currencies. The operating margin in this division was 15.1%. The strong growth here is led by Pepperidge Farm and Godiva, as well as Arnotts in Australia.

Foodservice sales for the year grew 4% to $455 million and operating earnings were $58 million, down 2%. The operating margin in this division was 12.7%. This division represents a great deal of untapped potential.

The company is in its strongest position ever, with an arsenal of number one brands in each of its categories, including Campbell Soup, Pepperidge Farm, Godiva, Swanson, Pace, Prego, and Arnotts in Australia. Not to mention its new Liebig and Erasco soups in France and Germany, both of which are the number one leaders in their market, and both of which grew market share to above 60% and 50%, respectively, in their respective countries.

The Fool will provide a summary of Campbell's fourth quarter conference call early next week -- though the call doesn't provide an incredible amount of information beyond what was just shared here. The stock now trades at 25.2 times trailing earnings and 22 times fiscal 1999 estimates.

Touchstone Friday. This week we narrowed our banking list to two finalists, Mellon Bank (NYSE: MEL) and Norwest (NYSE: NOB) combined with Wells Fargo (NYSE: WFC). The only splinter between the two now is the fact that I favor Mellon and Dale is favoring Norwest -- and Norwest's new DRP is a question mark, too. We'll have more on the issue next week.

Before we talked banks, though, we talked the market. The stock market, that is. Monday's column covered the topic of a declining market, which is actually a gift to long-term DRP investors -- especially those that are relatively new to the market and just beginning to save and invest, having numerous years to go.

On Tuesday, we covered Norwest, and on Wednesday we reviewed the gun-slinging history behind Wells Fargo. In your own Foolish quest to add a banking stock to your portfolio, be certain to visit the Drip Port's archives to aid in your decision. Many Fools are choosing their investment from our five finalists, or even the initial list of eleven.

On Thursday, we discussed our two finalists and touched on Campbell's earnings and Intel and Johnson & Johnson, too. If you have thoughts to share on our finalists, Mellon and Norwest/Wells Fargo, please post them on our Drip Companies message board.

To close, if you're interested in learning more about how we account for the Drip Port (using a Value Per Share accounting method), our Fools across the pond at the Fool UK are running their own real-money portfolio (up 30% this year against a flat market!) and addressed the accounting issue (they add money periodically, too) in their Friday column. Give it a read!

Fool on!

--Jeff Fischer

FoolWatch -- It's what's going on at the Fool today.

9/4 Close

Stock Close Change CPB $47 3/4 -2 3/16 INTC $78 1/4 +1 1/2 JNJ $76 1/8 +1 1/4
Day Month Year History Drip 0.66% 6.18% 6.50% (9.30%) S&P 500 (0.85%) 1.71% 0.36% 2.37% Nasdaq (0.34%) 4.49% (0.24%) (1.71%) Last Rec'd Total # Security In At Current 08/03/98 4.125 CPB $54.395 $47.750 07/01/98 9.724 INTC $80.239 $78.250 08/07/98 6.543 JNJ $70.138 $76.000 Last Rec'd Total # Security In At Value Change 08/03/98 4.125 CPB $224.38 $196.97 ($27.41) 07/01/98 9.724 INTC $780.21 $760.87 ($19.34) 08/07/98 6.543 JNJ $458.92 $497.27 $38.35 Base: $1900.00 Cash: $386.03** Total: $1841.13

The Drip Portfolio has been divided into 81.201 shares with an average purchase price of $23.399 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
8/24/98: sent $200 to buy more CPB.