Believe it or not, the topic of Campbell Soup (NYSE: CPB) struck a nerve with many readers who sent in e-mail after last week's column that outlined the company's woes. Many people have feelings about Campbell Soup that are traditionally reserved for those number-crunching tyrants, the Internal Revenue Service.
Long-time soup lovers lament the changing taste of some Campbell products. Company insiders concur that Campbell has cut costs every possible way (including the use of cheaper ingredients), which can result in lower quality soup. At the same time, the company raised prices more quickly than the rate of inflation the past five years. This lethal combination (lower quality at higher prices!) contributed to evaporating sales.
Some Fools posted on the discussion board that we should continue to hold the stock because nothing has materially changed. I'd agree with that argument if it were true! Unfortunately, it couldn't be further from true. We bought Campbell Soup expecting earnings to grow double-digits. Instead, they have shrunk. Every key initiative unrolled since 1997 has failed to increase soup sales. Adding insult to injury, the company implemented high fees in its dividend reinvestment plan (there's a big change right there!). So, as Yeats wrote in Easter 1916, "All changed, changed utterly."
How can Campbell create value again?
One Fool wrote to say that management must rethink its strategy and/or redouble efforts regarding soup prices, ingredients, convenience of soup containers, sales and marketing platforms, shelf placement, and brand message related to the red and white can. In other words, the company isn't hitting on any cylinder. Campbell Soup's business is treading water. Its cash flow is enough to fund operations mainly because the company holds dominant market share for something that people already buy.
As bleak as this sounds, the world isn't ending. Joseph Campbell, who retired in 1894, needn't turn over in his grave tonight. His company has plenty of strengths that it can retap, including a country-leading brand and dominant market position. To begin growing shareholder value again, first Campbell still needs to hire a new CEO following the former CEOs March resignation. One potential candidate bandied about is Mr. Kilts, the former CEO of Nabisco.
Once Campbell Soup finds a CEO (autumn is the goal) it will launch a new marketing campaign within months. This may boost sales, but more than advertising is needed to consistently grow the soup business. The company has attempted to grow sales with new products. More will be forthcoming. However, we suggest that a simple decrease in current soup prices would be more effective than new products (or more marketing). After all, there is a finite amount of new soups to create and everybody already knows Campbell's name.
Beyond growing soup sales 4% to 6% annually, as was the goal before we saw declines of 9%, 12%, etc., Campbell could begin to create shareholder value again by acquiring other food companies. The list of possible acquisitions is shrinking, however, because industry consolidation has been taking place without Campbell. Campbell's management states that it has enough liquidity for acquisitions. One potentially strong candidate that remains to be "squeezed" is Heinz (NYSE: HNZ). Heinz's sauce division could mix very well with Campbell's sauce division for considerable cost-savings.
Another way to create value is to sell the business. Campbell Soup could sell itself, lock, stock (no pun intended) and barrel, and probably at a meaningful premium. Rumors of this very possibility circulated early this summer. I don't see many companies eager to buy a no-growth -- or very slow-growth -- food enterprise right now, however.
Putting the soup "on the bubble"
In a nutshell, Campbell Soup may be an "OK" 20-year investment. You're not likely to lose your son's college fund if you drip into this stock for the next two decades. In fact, you'll likely make money. But will you beat the S&P 500? Maybe from this price (and with this 3.3% yield) you'll at least match the S&P 500 over the next 17 years -- that is, if management can grow earnings even 8% annually.
We want better. We will not place another penny into Campbell Soup (and we haven't for about two years) both because its Drip program is expensive and because its business isn't growing and isn't likely to grow meaningfully anytime soon. Instead, once we find someplace better for the money that we have invested in Campbell, we will move our money into that better investment.
None of our current holdings are screaming "buy $250 more of me right now!" -- not even our newest investment, PepsiCo (NYSE: PEP), which trades at 30 times earnings. So, we're going to sit tight and carry on in a search for a new investment. We want to find something that should grow earnings at least 20% to 25% annually the next five years, and then grow aggressively the many following years. Ideally, we'll find a fairly young, very promising company, and we'll put our old Campbell money into it.
We are long-term investors, but that doesn't mean that we buy and hold an investment that morphs into the opposite of what we hoped for and doesn't appear likely to improve notably. We buy and hold good investments. We don't want to buy and hold laggards. So, Campbell Soup is on the bubble to be replaced and next week we begin to outline our next study. Fool on!
--Jeff Fischer, TMF Jeff on the boards
