A few years ago, we would end every week with an emotionally-packed "Touchstone Friday" column, wherein we reviewed the week's events and covered many topics in one column. Those were the days. (Isn't reminiscing fun? Especially over a bottle of scotch.) Today we return to that format because we have four topics to address: our high-growth study, Campbell Soup (NYSE: CPB), Intel (Nasdaq: INTC), and next month's investment.
Mr. High-Growth Study
A loyal Fool -- a Fool's Fool if you will, a Fool for the ages -- wrote to say, "Hey, when will the high-growth study have an update this week? With the stock market falling, we need to know where there are good opportunities."
Indeed! The stock market continues to decline and long-term investment opportunities are emerging. An investor shouldn't rush to judgment, though. They should take time for complete due diligence. I know, I know. That's a "nanny" type of comment ("Oh, children, brush your teeth before you can have desert," or whatever they say), but it's true: Fools move with patient efficiency.
Our high-growth study has eight finalists so far: eBay (Nasdaq: EBAY), Genentech (NYSE: DNA), Paychex (Nasdaq: PAYX), Millennium Pharmaceuticals (Nasdaq: MLNM), Ariba (Nasdaq: ARBA), Redback Networks (Nasdaq: RBAK), Mercury Interactive (Nasdaq: MERQ), and Openwave Systems (Nasdaq: OPWV). If you're interested in getting ahead, begin by studying these companies. Study the ones in industries in which you feel most comfortable. In the end, you need to reach your own decision anyway, so you needn't wait for us.
All of our studies take time. Our 1999 food and beverage study took more than one year before we finally bought PepsiCo (NYSE: PEP) last spring. We looked at oil and gas for 10 months before deciding not to invest because our understanding was incomplete and wasn't improving. So, the current high-growth study, begun last fall, will take at least a few more months to complete. These are riskier, younger businesses, and so reaching a decision might take even more time.
We don't mind! We revel in the study, in the search -- in the quest. Being long-term investors, we don't rush.
The soup king's saga
On a white, snowy day here in lovely Virginia, we're reminded that the Campbell Soup story has been an excellent educator for us, and its lessons are still emerging. The soup giant, with 80% domestic market share, retooled its business and marketing plan in the mid-1990s and aimed for 12% to 15% annual earnings growth. Margins began to rise, as did the stock. In 1998, earnings did grow 15%. We bought into the story. Then the train derailed.
Soup volume and earnings surprisingly turned negative in 1999, and the stock, which had soared to a lofty P/E in the 40s, took a 50% dive. The company declared that its marketing plan wasn't working. At the same time, management continued to work to improve: pull-off can tops, more soup varieties, greater distribution to more locations. Campbell Soup believes it can resume double-digit earnings growth. It just needs to find the right growth drivers -- the right levers to push and pull.
How does a company that dominates the canned soup market in the U.S. make that business into a double-digit growth business when soup volume only grows 1% to 2% annually? It does so through effective marketing of more convenient products that appeal to more and more people; ever-greater distribution; steady annual price increases; and, as always, cost savings. We're watching to see if and how Campbell can accomplish these things, and when it does, how the business and stock will react.
This is a great study of investing and consumer business -- it really is. There may even be a book to be written on this story when the outcome becomes clear.
Last week, Campbell Soup reported second-quarter earnings per share of $0.65, flat with last year, while consumer soup purchases increased 5% -- a good sign. Gross margin rose to a record 56%, and free cash flow for the first half of the year grew to $682 million. Free cash flow the past three years has been:
Campbell's Free Cash Flow
1998: $684 million
1999: $657 million
2000: $965 million
Due to new annual cost savings of more than $200 million, free cash flow could top a record $1 billion this year. That would price the $14 billion company at about 14 times free cash flow -- a significant discount to its food peers that trade at above 30 times free cash flow. Earnings this fiscal year (ended June) are expected to be flat, but the company may be poised for a much brighter fiscal 2002. The saga continues.
Intel cutting back
Even giants get sick in a weak economy. I don't see catalysts to propel Intel's business this year when all of the computer makers are setting low expectations. As for the "It'll pick up in the second half of the year" story, I'll believe that when I see it. I'm not concerned that Intel's sales should slow after a five-year boom. I'm not concerned that it is cutting back in various ways, as it just announced. What concerns me is that during the boom, Intel didn't grow its operating earnings much.
Intel experienced the boom while weathering a seachange in its business -- the change to cheap PCs -- and it completed the change successfully. But this change means that during a great economic expansion, Intel mainly benefited through making good investments. Much of its 1998 to 2000 net income came from investments. Meanwhile, it hasn't grown its operating earnings since 1997. Now operations are slowing and this is not a strong investment environment, either. So, the company faces many challenges, as we discussed in January. Long-term, we do believe in its abilities -- managerial, manufacturing, marketing.
Our March investment
Our companies are valued -- on their forward P/E at least -- as follows:
Ticker Price 2001 EPS Est. 2001 Forward P/E
INTC $31 $1.05 (down 36%) 29.8
JNJ $96 $3.84 (up 13%) 25.0
MEL $46 $2.27 (up 12%) 20.2
PEP $46 $1.63 (up 13%) 28.0
I believe that Johnson & Johnson (NYSE: JNJ) and Mellon Financial (NYSE: MEL) are the most certain to make this year's projections. Intel's projection is pretty low, so it could top it. But then again, it could miss it. Pepsi is fairly certain to perform, but you're paying more for that certainty than with the others. Mellon, as a financial company, usually commands a lower P/E multiple. Overall, this is one of those months when I wish that we could just send money to every company. It's a wash. But we'll send our $100 to Mellon Financial, as it has been five months since we have. That check goes out on Monday.
Have a Foolish weekend!
Jeff Fischer owns all of the stocks in this portfolio, and also owns eBay, Mercury Interactive, and Genentech. So what doesn't he own? Just about everything else. View his profile to see his entire port. The Fool is investors writing for investors.
