Dear Mr. Berko: What is your opinion of Campbell Soup? They now seem to take up more shelf space in most supermarkets and I notice that their advertising is picking up. I think I’d like to buy 200 shares but figured I’d better get your opinion before I spend $5,000. I will be using the proceeds from a recent sale of Zimmer, which you recommended at $42 last year and sold 50 shares at $87. I think Zimmer will split and I will have 100 shares again. What do you think?
W.J.
Oklahoma City
Dear W.J.: In July of 2002, I bought 200 shares of Campbell Soup Co. (CPB-$26) at $21.
CPB has been in the downhill slumps since reaching an absurd high of $63 in 1998, when it had revenues of $6.6 billion and record earnings of $1.90.
CPB products are as much a part of Americana as V8 Juices, Godiva Chocolates, Prego, SpaghettiOs, Swanson, Franco-American and Pepperidge Farm. In fact, some prominent past spokespersons for Campbell Soups have been Ronald Reagan, Johnny Carson, Jimmy Stewart, Donna Reed, Orson Wells, Helen Hayes, George Burns, Gracie Allen and Robin Leach. If they say it’s ” M’m! M’m! Good!” it’s gotta be so!
This company outsells its leading competitor by 7 to 1 and owns 71 percent of the $4 billion soup market. While soups represent 41 percent of U.S. revenues they comprise 61 percent of U.S. profits. CPB has now learned that it’s not enough to remain a legend and rest on its past laurels. Between 1998 through 2002 management cut back on marketing figuring that current momentum would carry revenues forward. Big mistake that. Hard-hitting competition from private labels, General Mills and Heinz clobbered CPB’s profitability and morale.
The new chief executive officer (Doug Conant who took the helm in 2002) revived brand popularity and increased its marketing budget by $200 million a year. Conant spent heavily on new technology that improved quality and introduced “easy-to-open cans.” Conant increased the research and development budget, which created new products in the convenience market and new shelving designs.
The results were fabulous. Sales were up 16 percent (excluding underperforming divestitures) and profits grew by 14 percent last year.
The public’s new perception of CPB’s products has grown by orders of magnitude. This year, 71 percent of respondents considered CPB’s products superior to the competition vs. just 13 percent in 2001. Campbell is posting net profit margins of 10 percent, which is among the best in the food group. Campbell has achieved double-digit gains in its biscuits and confections products compared to an average 5 percent for its peers.
And CPB also seems to have positioned itself as an anti-obesity company. Its product categories are considered healthy and on trend with the market. CPB has a fair balance sheet and new management has reduced long-term debt to $1.8 billion from $2.4 billion since Conant took the helm. With new cost controls I think CPB’s book value could triple to $7 in the next four to five years, net profit margins could reach 10 percent and return on shareholder equity might reach 34 percent.
Campbell is a classy, pale-blue chip company with worldwide brand recognition, especially its iconic red-and-white cans of condensed soups. In the coming four years, CPB’s revenues could reach $8.5 billion and earnings could top $2.05 a share. However, I don’t expect any improvement in CPB’s niggardly 63-cent dividend.
Campbell, as you know, is one of those companies whose products are readily consumable and therefore generate frequent repeat sales. So in the coming four to five years, I think CPB could trade at an average price-earnings ratio of 20 and I think the stock could move to the $40-$42 level. That’s an average annual return of 15 percent, including the dividend. The growth prospects are attractively modest and as a long-term investor, you might do well owning 200 shares.
A number of our accounts own shares of Campbell Soup in their managed portfolios.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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