Campbell Chilled (Drip Port) January 15, 1999

<THE DRIP PORTFOLIO>
Campbell Chilled
Plus, Touchstone Friday and Mellon

by Jeff Fischer ([email protected])

Alexandria, VA (Jan. 15, 1999) -- All of our companies have been busy announcing news, both good and bad. Intel reported record earnings this week, while Campbell Soup shared that it will not meet estimates for 1999. Also, Mellon announced earnings to end the week, and Johnson & Johnson... well, it didn't announce much at all. It will announce earnings the final week of January.

We covered Intel's (Nasdaq: INTC) fourth quarter results on Tuesday, and we summarized its conference call, too. The company achieved record quarterly revenue of $7.6 billion, with microprocessor unit shipments up 13% for the quarter and 20% for the year. Revenue for the year was $26.3 billion and net income was $6.1 billion. Cash flow per share totaled $5.05. The company's earnings of $1.19 per share rose 21% and topped estimates by about a dime, causing a slew of analysts to raise their numbers for '99. The stock is trading at 29 times this year's estimate of around $4.60 per share.

On Friday, Mellon Bank (NYSE: MEL) announced its fourth quarter and year-end results and that it'll shed three businesses in order to focus on higher-return operations, all of which helped to raise the stock $5, or 8%. Our newest investment grew earnings per share 13% for the year and 15% on a tangible basis, while its return on assets rose to 2.13% from 2.05% in 1997. The company's book value rose to $17.26, up from $14.39 at the end of 1997.

You can study Mellon's sixteen page earnings report online (thanks to the beauty of this still very new medium!), and we'll write more about Mellon in future columns. To read Dale's recent (December 30th) excellent overview of the company and his thoughts regarding 1999, simply click here. (Dale choose Mellon as his financial stock for 1999 in Industry Focus 1999, by the way.) Mellon is trading at 19.3 times this year's earning estimate.

Campbell Soup (NYSE: CPB) is our big goat for now, falling $8, or 15%, this week. 15% is a heady decline for such a large, high-quality company, though it's less of a decline than Coca-Cola and Gillette experienced in the past four months. The poor news from Campbell was surprising.

Following an excellent start to fiscal '99, with soup volume sales rising sharply, the company is now predicting that it will fall well short of earnings per share estimates for the year. Campbell will likely underperform recent expectations by 20 cents per share. What happened?

The early strong sales didn't last. Management is citing the weather, estimating that a warm winter evaporated 2% to 3% in soup volume growth. This means that Campbell's second quarter will see volume growth in condensed soup of only about 1% to 2%, well short of the 4% to 5% goal which was achieved in the first quarter of fiscal '99. The fact that this happened while Campbell is advertising heavily and after it had put in place a new compensation structure for sales isn't heartening. If we must find a bright side, at least the results from the first quarter offer the hope that Campbell's initiatives can indeed work (assuming that the strong quarter wasn't an anomaly).

Whatever the case, for now earnings growth probably won't be impressive for at least a year, or closer to two. The company announced that almost every part of its supply chain needs improvement. That will take time. Eventually improved efficiency could result in $100 million in savings (most of it in fiscal 2000), but sales will suffer meanwhile as management reduces trade inventories significantly (it won't put so much soup into the inventory channel). Like 3Com or Iomega in 1998 when those companies reconfigured and streamlined inventory practices, Campbell hopes to pay now in order to gain later. For long term investors, the move should eventually pay off in lower costs and better inventory control.

For DRP investors, the year or more of "lag-time" (during which the stock should lag, is what I mean) might actually be a favorable situation. It was the situation that Intel experienced for much of 1998, and it served us well.

We might save up a few months' savings ($200) to send to Campbell Soup sometime this year. We'd send at least $200 in order to keep the fees low on a percentage basis. However, we're not in a big hurry. Earnings are expected to be flat this year and then grow only 8% in fiscal 2000 (which is admittedly a big guess). However (again), while we consider the dire year or two facing Campbell, we'll remember that stocks trade on future expectations more than on current results.

Campbell Soup is now priced at a significantly lower multiple to earnings. At $45, the stock is trading at 23.3 times revised 1999 earning estimates of $1.93 per share, and 21.6 times 2000 estimates of $2.09 per share. The stock's yield is 1.90%, up from 1.40%. Being confident in management (and the long term), we'll keep an eye on Campbell and we'll likely ladle up some more shares for the Drip Port later this year. If it goes lower, even more likely.

Touchstone Friday. The week was busy. On Monday, George wrote about buying Home Depot (NYSE: HDT) online, spotlighting an exciting new development in DRPs that will become widespread over time. Tuesday was spent on Intel, as shared, and on Wednesday we considered the many big drugs expected to be launched by leading pharmaceuticals this year. If you're interested in possible blockbuster drugs for '99, check it out. Finally, on Thursday Brian provided a complete overview of our oil and gas study to date (an excellent summary!) and tells everyone where we're going next.

Finally, all of our numbers have been updated, with two recent Mellon buys added. The only glitch: our $40 check to Intel in November has not been received yet, it seems. We have no confirmation and it hasn't been cased. We'll wait and see and then take appropriate action.

For now, we'll send $100 more to Mellon one week from today, on January 22nd. We have slow mail, so we'll likely be buying the shares in early February. (It's not very important anyway when we buy!) All of our transactions are available on the Drip Port transaction page. See you on the message boards (linked in the top right of this page) if you want to talk or have questions. Have a great weekend and...

Call Your Boss a Fool.