Soup Just Simmerin'
How can Campbell turn up the fire?

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (April 6, 1999) -- Campbell Soup (NYSE: CPB) held an hour long conference call yesterday that Brian and I listened to with fierce concentration. The company reiterated that it's comfortable with 1999 earning estimates of $1.89 per share (putting the stock at 21.6 times forward estimates) and restated its devotion to growing sales across all of its brands. Current operations are bogged down partially because of inventory reduction programs and the implementation of a new inventory practice.

During the call, Campbell's management shared the belief that the ready-to-eat, away from home food market is quite important to its growth. In the United States, more food is now consumed outside the home rather than inside its cozy confines. Campbell is putting soup kitchens in airports, fast food joints, office complexes, malls -- everywhere but your home.

Though expanding in many markets, Campbell is actually working to decrease the importance of condensed soup to its sales mix. The company doesn't want its fate to depend too heartily on one slow-growing line of business. This reconfiguration won't come easily, but it's far from impossible.

Soup and sauces accounted for 66% of Campbell's $6.6 billion in 1998 sales. Biscuits and confectioneries accounted for a not insignificant 22% of sales, and food service ("come an' get it!") made up 7%. However, about 80% of Campbell's net income was derived from condensed soup, so the company needs to sell a lot of biscuits in order to decrease soup's impact on the bottom. (This is something like Coca-Cola (NYSE: KO) hoping to rely less on soda sales for its net income. That would take some doing, given the $18 billion business it has.)

Acquisition will continue to play an important role in Campbell's growth and in stirring up the company's product mix. The dry soup ("just add water!") companies Campbell acquired overseas and last year's StockPot acquisition in the U.S. are recent examples of bright product diversification. Campbell is acquiring businesses that it knows (soup, baby), but in significantly different arenas of the business (dry soup and ready-to-eat soup, baby).

There wasn't a great deal of new news shared in the conference call. Management is committed to continuing its share buyback every year (slurping up 2% of all outstanding shares), which is possible due to its strong positive cash flow. It was also, not surprisingly, hypothesized by some at the call that the stock now offers considerably more value following its decline this year. (The company is probably ready to buy back more shares before long if it hasn't already.) With a yield of 2.10% and a forward P/E on year 2000 estimates of 19.5, the stock is as inexpensive -- on a relative basis -- as it has been in the past three years. (Disclaimer: that doesn't automatically mean it's a bargain, of course.)

We aren't certain that we want to invest more money in Campbell right now. The early failure to grow soup sales despite all of its aggressive initiatives has us somewhat gun-shy and uncertain. We do consider the recent weather, however, in Campbell's favor. The warm winter worked against our company. We do consider Campbell's staying power, too. It's going to be in business in 19 years even if Martians attack, asteroids hit Earth, or disco returns. However, we also consider that generic soup sales climbed this year, even during the warm winter and even during a record strong economy during which you wouldn't think penny-pinching would matter much to many people.

So, we're in a holding pattern. Campbell has a great deal working for it, but it also has large, somewhat strange question marks around it -- Why couldn't it grow sales while generics did? How much pricing power does it have if it's losing market share? How will it jumpstart condensed soup sales?

Our inaction here should have little influence on how you invest, however. All Fools must decide what makes sense to them. Many are buying Campbell at these prices. (If and when we do invest, we won't invest less than $200 at a time in Campbell due to the $5 fee each time we invest.) To discuss Campbell, please visit the Campbell message board. I find myself there every day or two. ("Hello? Anyone care to talk?")

Intel Corp. (Nasdaq: INTC) has climbed from $115 to $130 in the past two weeks, typically without particular news to account for the ascent. The company will announce first quarter earnings -- as will Johnson & Johnson (NYSE: JNJ) -- in mid-April. Intel is expected to report $1.10 per share, up 36% from last year. For the full year, it's estimated to earn $4.68 per share, putting the stock at 27 times estimates. J&J is expected to report $0.80 per share this quarter, en route to $2.98 in earnings per share this year. It trades at 31.5 times the '99 estimate.

Today the rumor floated that Intel will invest $30 million in the speech dictation and translation products of a Belgium company. Before long, we expect to speak these columns into the computer, writing them in one-fifth the time that it takes now. Give us another few years and the art of writing will be entirely lost to new technology. Well, actually, that's hardly possible now is it?

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