For the past week on the Drip discussion board, Fools who own shares of Campbell Soup (NYSE: CPB) have discussed whether they should hold onto the beleaguered soup giant or sell it. In the last two years, the company's earnings per share have declined an average of 6.5% annually, and growth is not likely to reoccur in earnest until fiscal 2002 at the earliest. In fact, revenue in fiscal 2001 is expected to be flat with 1996 revenue.

The problems at Campbell are many, but management is pointing to marketing. Marketing missteps have not helped to combat the national decline in soup consumption. Takeaway (or off-the-shelf) soup sales fell 9% year-over-year in the three months ended in April, and dropped 3% in the quarter ended in mid-June. And this trend is not expected to reverse soon. Campbell's fiscal 2001 (which began this month) is expected to show negative earnings growth for at least the first two quarters, and flat growth for the year.

More than two years ago, Campbell spun off Vlasic Foods (NYSE: VL) at $18 per share. Vlasic is now a one-dollar stock, so investors are in a pickle. (Yes, that was bad.) We started to buy Campbell when the spin-off was complete based on the promise that a focused product portfolio (of all top brands) at Campbell would grow earnings per share 12% to 16% annually. That was management's guidance.

What went wrong since 1998?
First, we agree that Campbell's marketing campaign has been benign. It did not boost soup sales. Second, changing soup label designs (as Campbell did last year after several decades) was unnecessary and probably did not win any hearts -- if anything, this may have broken a certain connection with the company that many consumers may have felt since childhood. Third, many of the new soup recipes don't taste as good as the old ones.

Fourth, many people believe that society is continuing to eat more and more convenient, or faster, foods. This is why Campbell is entering the "ready-to-eat" soup market, where it has had sales growth. However, ready-to-eat soup is a difficult business. When you eat soup, you basically need to be sitting still for 15 minutes. This may be too much to ask of a working person on a daily basis, and habits form through daily reoccurrence.

How could we have avoided this?
Perhaps if we had studied past soup sales for the past decade more carefully and learned how difficult it is to grow sales volume year after year, we would have realized that management's goals in 1997 were going to be very difficult to achieve. Even had we concluded this, however, we would not have foreseen negative earnings growth for two years and counting, with three likely. We probably would have bought the stock anyway and merely hoped for results on the lower-end of the lofty expectations.

Campbell's valuation -- is it tasty?
At $26 per share, Campbell Soup trades at 14.7 times fiscal year 2001 earnings per share estimates. That puts Campbell's valuation on par with peers, even though the year's earnings growth is expected to be flat. Now the most that we can hope for from 2000 to 2005 is about 8% annualized earnings per share growth, and achieving that will require strong results from 2002 through 2005.

The dividend payout at this share price is 3.4%. However, more relevant to us is the payout on our investment cost basis, which is $53.97 per share (hard to believe, eh?). At that price, our dividend yield is 1.69% -- not much more than the 1.3% yield that you can get by buying PepsiCo (NYSE: PEP) or Johnson & Johnson (NYSE: JNJ) today. So, Drip Port shouldn't sit on Campbell for the 3.4% dividend yield. We're not getting that.

What will Drip Port do with Campbell?
We have never sold a stock from Drip Port, but (as we've always said) we will if a company fails us beyond repair, or appears very likely to do so, or (like all Fool ports) we believe that we have a much better place for the money. Also, since we can't Drip into Campbell without paying high fees, doesn't having the stock in this low-fee portfolio defeat the purpose anyway? So, we should only keep Campbell now if we believe that the stock we hold is a good value (better than others that we can find).

Next week we discuss how Campbell Soup can build value, and we'll try our best to answer the question: What's next for Drip Port and Campbell? After that, we move in a new direction. We will search for a company with considerably higher growth rates than J&J, Mellon (NYSE: MEL), and PepsiCo, and with strong 17-year prospects. Have a Foolish weekend!

Related Links:
Why Aren't You Eating Soup?, Drip Port, 05/19/00
Why You Aren't Eating Soup, Drip Port, 05/24/00
Campbell Soup Buy Report Collection, Drip Port