Campbell Cookin'
Q1 Earnings, and Mellon Bank

by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Nov. 23, 1998) -- Slowly simmering towards a new high, Campbell Soup (NYSE: CPB) announced first quarter fiscal 1999 earnings last week that met expectations. Since the announcement, the stock has risen towards its all-time high, mainly on the news of strong volume growth.

Before currencies and divestitures are considered, sales rose an impressive 9% year-over-year. Campbell's soup volume in North America climbed an impressive 4%, suggesting that the company's product initiatives and reinvigorated advertising is proving beneficial. Global soup sales increased 7%, with 3% due to volume growth and 4% the result of acquisition (primarily the acquisition of Stockpot and the European leader, Leibig).

Overall, the 9% increase in total sales was due to an impressive 5% gain in volume and product mix (selling higher priced products), a 2% gain in pricing (and I didn't even notice!), and a 2% increase due, again, to acquisition.

Here is where the fireworks appear, flashing above our heads to spell: Efficiency. The following is partially why we were attracted to the company. Last January, Campbell was in a position to greatly improve its margins. Well, it has, and it continues to do so by selling off low-margin businesses and through cost-cutting.

In the first quarter of fiscal 1999, gross margin improved tremendously over last year, hitting 54% against only 50.7% in the first quarter of 1998. This means that for every dollar of sales, the product only cost Campbell 46 cents.

Campbell's operating margin increased even more: up 5 percentage points to 24.8% compared to last year's 19.8%. This means that Campbell has greatly reduced expenses on an operational level (salaries, etc.) beyond what is shown -- because Campbell was able to grow margins even while increasing its advertising and marketing expense. Total marketing expenses rose 15% from last year, and trade promotions increased 23%.

With its record-high operating margin of 24.8%, for every dollar of sales Campbell keeps almost 25 cents after covering the cost of the product itself (46 cents), and after paying the cost to run the company (29.2 cents per dollar of sales).

Especially strong products were new soups, with Chunky sales up 21%, Simply Home jumping 17%, and its old-fashioned standby -- the red and white condensed soup that Warhol loved -- up 3%. Overall, Campbell's market share improved against key competitors including Progresso and Healthy Choice, and private label sales (that cheap watery garbage -- ahem) also declined. Granted, Campbell Soup did increase its soup advertising expense 30%, so we better see sales growth and increased market share.

Pepperidge Farm revenue was strong, rising 10% while operating profit leapt 14%. (In fact, I'm eating Goldfish crackers as I hack through this column -- Fool HQ provides Goldfish as a perk, along with oysters on the half shell). Sales of Goldfish grew double-digits, maintaining their status as the fastest-growing cracker in the country. Say "bonjour!" to Goldfish, because they're going international now, too. (How can anyone resist these things? Did you know that Campbell bakes Goldfish such that they should crunch exactly 12 times on your back molars? If they crunch less or more than that, they're imperfect and should be rejected, not sold. Give it a try at home. MUNCH MUNCH MUNCH!)

Foodservice sales rose 18%, with 7% in gains coming from the acquisition of Stockpot. Kmart is a recent new market. And finally, Campbell has repurchased about 25% of the $1 billion stock buyback authorized for this year.

The stock trades at 26.9 times 1999 EPS estimates and 23.8 times year 2000 estimates, putting it a lower premium to its peers and to the S&P 500 than it usually trades. Unfortunately for us, we're not buying shares unless we're buying at least $200 worth (otherwise we'd pay too high a commission percentage-wise), and I don't see this happening anytime soon.

Mellon Bank (NYSE: MEL) is our December purchase. We'll be buying $100 worth of Mellon. I'm sending the check tomorrow morning and the shares will likely be bought next Monday (they're bought every Monday). If you know your account number, you can send an optional investment to Mellon at this address:

ChaseMellon Shareholder Servies
DRP Department
P.O. Box 382009
Pittsburgh, PA 15250-8009

You must include a note with your intention and your check, as well as your account number and social security number. If you don't know your account number and believe you should be enrolled by now, ChaseMellon can help you at 1-800-205-7699.

Please note that the correct P.O. Box above contains one extra zero that had been missing on my message board post showing the address last week. The address above is correct. Apologies for any inconveniences. Surely, even with one zero missing, your envelope should arrive.

Our Oil Study. Tomorrow, Brian Graney (TMF Panic) will continue our study. He'll address the historical performance of oil stocks. Have they outperformed, or underperformed, in relevant history?

If you have questions about Campbell or Mellon or anything (including the size in square kilometers of European countries) please post on the Drip Companies message board. Fool on!

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11/23/98 Close

Stock Close Change JNJ 87 7/8 -1 1/8 INTC 113 9/16 +1 1/2 CPB 58 7/16 + 15/16 MEL 64 1/8 +1 5/8
Day Month Year History Drip 0.58% 15.57% 34.73% 14.74% S&P 500 2.12% 8.15% 22.44% 24.90% Nasdaq 2.55% 11.63% 25.92% 24.07% Last Rec'd Total # Security In At Current 09/02/98 8.027 CPB $52.867 $58.438 09/01/98 9.727 INTC $80.238 $113.563 10/07/98 7.850 JNJ $71.405 $87.875 10/07/98 1.000 MEL $48.560 $64.125 Last Rec'd Total # Security In At Value Change 09/02/98 8.027 CPB $424.36 $469.08 $44.72 09/01/98 9.727 INTC $780.50 $1104.66 $324.16 10/07/98 7.850 JNJ $560.53 $689.82 $129.29 10/07/98 1.000 MEL $48.56 $64.13 $15.57 Base: $2100.00 Cash: $237.52** Total: $2565.20

The Drip Portfolio has been divided into 89.430 shares with an average purchase price of $23.482 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:
10/24/98: Sent $40 to buy more INTC.
10/26/98: Sending $60 to buy more JNJ.