Why Soup Is Good Stock

08/11/2009 11:45 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says Campbell Soup should see decent growth in earnings and revenues over the next couple of years.

Campbell Soup (NYSE: CPB) makes branded food products, which are available in 120 countries around the world. Its largest markets are North America, France, Germany, Belgium, and Australia.

The US soup, sauces, and beverages segment was responsible for 51.7% of fiscal 2009 year-to-date sales. Products include condensed and ready-to-eat soups, broth, canned poultry, pasta, and pasta sauce; Mexican-style sauce, chili, gravy, beans, and vegetable and fruit juices. Brand names include Campbell’s, Swanson, Prego, Pace, V8, and Wolfgang Puck.

The baking and snacking segment accounted for 22.8% of sales. Products include cookies, crackers, breads, frozen foods, biscuits, and salty snacks. Brands include Pepperidge Farm and Arnott’s. The international soup, sauces, and beverages segment, which accounted for 17.6% of sales, consists of sales outside of the US.

In addition to the brands mentioned above, international labels include Erasco and Heisse Tasse in Germany; Liebig and Royco in France; Devos Lemmens in Belgium; Bla Band in Sweden, and Habitant in Canada.

The North America food service segment accounted for 7.9% of sales. It supplies soups, entrees, beverages, and other foods to food service businesses. The recession has affected consumers’ spending trends. Condensed soups have held up better than ready-to-eat soups. Sales of Prego pasta sauces and Pace Mexican-style sauces have been strong as more people began preparing meals at home.

Yet fiscal third-quarter net sales fell 10.3% year-over-year to $1.69 billion. Although higher prices offset weak volumes, unfavorable foreign exchange and divestitures reduced the top line. However, the gross profit margin increased 201 basis points to 40.63% and the pro forma operating profit margin jumped 316 basis points to 16.67%. Pro forma net income inched up 3.6% to $171 million or 48 cents per share.

Longer-term targets include 3%-4% annual sales growth and 5%-7% annual per share earnings growth. However, competitive pressures, lack of acceptance of new products, and an inability to expand into new markets could jeopardize these goals. In addition, the company’s significant international footprint exposes it to foreign exchange risk.

Yet we are encouraged by several initiatives. CPB is adding new Mediterranean soup styles to its Select Harvest line, retooling its Campbell’s Chunky soups, launching a reduced sodium tomato soup, introducing new condensed light soups, and increasingly emphasizing value in its marketing efforts. It is expanding its soup offerings in China and plans to increase its presence in Russia.

In local currencies, CPB should see 3%-4% organic revenue growth for fiscal 2009, which ends August 2nd. However, unfavorable foreign exchange will likely erase five percentage points from the top line. Nonetheless, thanks to higher pricing and effective cost controls, per share earnings (including unfavorable currency effects) should be flat to slightly up. (The shares closed below $31 Tuesday—Editor.)

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