We bought Campbell Soup (NYSE: CPB) in early 1998 because the company had spun-off all of its underperforming businesses and had a strategy to grow earnings per share 13% to 16% annually. Campbell did indeed grow earnings 16% early in 1998. Then it went cold, and then it went really cold.
Soup sales began to decline and earnings started to slip. Campbell spent more money on marketing, including Super Bowl ads, but soup volume still drained lower. Despite this, the company was able to trim $200 million in annual expenses, and it grew free cash flow to a record $965 million in fiscal 2000 (which ended in July). So, even during flat sales, free cash flow rose more than 40%. Still, the stock fell 50% over the past two years, with no growth in soup volume in sight.
Adding insult to injury for us in Drip Port, Campbell instituted fees in its Drip plan. Campbell's free Drip began charging $5 per purchase. Since we only invest $100 per month, that $5 is a big 5% fee each time we want to invest, so we turned our backs and said, "No thanks." We stopped buying Campbell in mid-1998 due to the fees and due to its soggy business results.
For several months we pondered what to do with Campbell: Keep the shares longer-term as we planned to, reinvest the dividend, and accept the fee that we pay on each reinvestment (about $0.36 per year right now); or sell the shares and replace them with something better? We concluded the latter. Following the usual Fool strategy, we'll sell a stock when we believe that we've found something better to buy instead.
So, we began to search, and because we want to own shares in the stable food and beverage industry, we naturally looked there. After several months of thinking, we chose PepsiCo (NYSE: PEP) and enrolled in its Drip. But, we haven't sold Campbell Soup yet, and we might not for a long time. Why not?
Campbell isn't performing in the near-term -- now two years since we bought it -- but that doesn't mean that it won't perform in the long term, and we're long-term investors. This might sound odd, but I was reminded the other day, while walking through a park and looking at trees (literally), that things do not always grow straight up. When you plant a tree, it might grow more sideways than up for several years at a time, but you don't cut it down because of that.
As long as we believe that Campbell's business can begin to grow "up" again, as long-term investors, we'll be more inclined to keep the stock. That is, as always, unless we find something better -- meaning a better business in the same industry at a better price.
Pepsi has a better business, but Campbell has a better stock price. In fact, Campbell's valuation is low when measured against other food industry giants, and I believe its pricing situation has a good chance of changing to our advantage in the next two years. Campbell has more than 70% market share and one of the best brand names in the country. As soon as it begins to grow soup volume again, its valuation will likely expand. (We analyzed Campbell's current valuation today in a Motley Fool Research column.)
So, when will soup volume finally grow again? Campbell recently announced that fiscal 2001 (ending July 2001) will be flat with fiscal 2000, because the company is spending more money on advertising. Its main goal is to start increasing soup volume again! In Campbell's first quarter of 2001, soup volume rose 3% thanks to marketing spending.
Meanwhile, the stock market has already priced a flat 2001 into the stock and is looking ahead to 2002. If Campbell's advertising and product initiatives work, 2002 could lead to earnings per share growth again and a better-performing stock. In fact, based partly on this premise and others, Campbell Soup is a "Focus Stock" in the Fool's Industry Focus 2001.
Drip Port will not buy more Campbell due to the fees in its Drip. However, until we see a better business at a better price (after Pepsi declines meaningfully, perhaps), we won't sell our shares, either. The lesson I'm relearning from Campbell is that when you invest for the long term, you don't sell simply because the short term doesn't work out as you'd hoped. You do re-evaluate. Then, if merited, you continue to give a long-term business a long-term chance. After all, Intel (Nasdaq: INTC) wasn't doing very well when we bought it in 1997, and it made several mistakes this year, too.
To close, be sure to read today's related Campbell article on Valuing Food Stocks. To discuss the Drip column, visit us on the Drip Companies board linked above.
