The Soup Goes On
Our goal and how we're long-term investors

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (May 20, 1999) -- Campbell Soup (NYSE: CPB) has provided us with two surprises in the past year. One, it implemented fees in its direct investment plan. Two, during the middle of its most aggressive business push, it announced poor volume and lower expectations. Neither surprise was fun.

Campbell's third quarter 1999 results didn't offer many surprises. Earnings per share matched the $0.37 estimate. Sales totaled $1.49 billion, up 2% before currency and divestiture impacts, down 5% as reported. Earnings from continued operations climbed to $162 million from $157 million, evidence of successful cost cutting.

How is the primary business, the numbers that everyone watches?

Well, worldwide wet soup shipment (as opposed to dry soup, to which you must add water) dropped 6% due to a 9% decline in the United States that resulted from Campbell's decision to terminate quarter-end promotions for retail customers. Outside the U.S., wet soup shipments rose 4%. Actual wet soup retail purchases in the U.S. -- in the end, the more important number -- rose 3%, a good sign.

Management continues to stress innovation as its key to growth. Citing the fact that in today's hustle-and-bustle world more and more people eat out, management has focused on the away-from-home and fast-food market, marketing soup in heatable plastic bowls and resealable plastic containers.

Another key earnings driver: cost savings. Campbell is on track to save $150 million this year and even more next year, savings that can directly result in increased free cash flow. The company continues to plan to repurchase 2% of its outstanding shares annually -- a heady commitment.

Campbell said that volume of its soup business should increase in the current quarter but decline slightly the following quarter. Overall, earnings growth of 10% is expected next year. The earnings model that estimates 10% growth probably includes the 2% share buyback, meaning that pure earnings growth will likely be below 10%. Even so, if diluted earnings per share can grow 10% and the dividend remains above 2%, Campbell stock could achieve a respectable annual return.

At about $42 per share, Campbell trades at 22 times the fiscal year 1999 earning estimate of $1.88 per share. It trades at 20 times the year 2000 estimate. The fiscal year ends July.

We invested in Campbell for many reasons. The company was doing more than any other in our study to improve its business model. In fact, Campbell finally ended its model reconfiguration this quarter when it announced plans to sell Fresh Start Bakeries. The company now operates only higher-margin, niche-leading products. By improving its business model, Campbell promised to improve margins. It has done so greatly, by several points across the board. At the same time, management promised to cut costs while freeing capital to market high margin items and develop new products. It has increased marketing expenditures, but sales growth only followed in one quarter, then trailed. It is still bringing new products into the limelight.

The many positive potential outcomes that made the Drip Port invest in Campbell Soup have happened and continue to happen. The only one that hasn't, however, is the most important to the stock price: earnings growth. Especially the earnings growth that was hoped for -- in the 14% to 16% per year range. The earnings model showed that type of growth, but it depended on a healthy but realistic rise in soup volume. We're confident that Campbell will grow steadily as time passes (10% next year wouldn't be horrible, given that other food and beverage companies are having flat years), but we're not confident investing in something with fees.

That's what it continues to come down to.

A Fool posted on the message boards that we're short term and not living up to our long-term philosophy. We bought Campbell for the long term, only about one year ago, so we shouldn't stop buying it when things are looking "down." I responded on the board. The fundamentals are not the issue. We'd like to buy Campbell while it languishes, just as we did with Intel. The issue is primarily one of logic: the fees. A $5 fee to buy the stock is more than discount brokers will soon charge.

That's ironic to say the least. So much for the "low-cost direct investment plan" Campbell says it offers.

A $5 fee also means that if we buy Campbell just five times per year, we'd pay $500 in commission over 20 years. We're only investing $24,500 total. No way are we paying $500 of that in commission. When Campbell went to its current fee structure, Campbell lost not only shareholders, but customers. So be it. I predict that Campbell will change its plan when discount brokers offer even better rates than its so-called direct investment plan. It'll change its plan or look quite stupid.

Here's the respectable Fool's post, asking the important question of why we're not buying Campbell; and here's my response, explaining how we are long-term investors, and therefore why not buying Campbell now makes sense to us. We're a low-cost portfolio even more than we are a direct investment portfolio. Whatever option presents the lowest cost when investing and reinvesting dividends, we'll take it.

The conversation continues on the message board. Just follow the thread linked above. The most important point eventually made, in my opinion, is that every Fool must make his own decision. I know that many of you continue to buy Campbell for very good reasons. Any decision that you make for yourself is Foolishness at work. That's the entire point of the Fool. This portfolio is merely an example, not a model to follow step by step.

Drip Port's goal: to build long-term wealth by regularly investing -- and reinvesting -- small amounts of money, cost free, in leading companies.

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