Opportunity Cost Too High At Campbell Soup

By Ryan C. Fuhrmann | November 26, 2010 AAA

Campbell Soup (NYSE:CPB) is the undisputed leader in global soup sales. However, the company is having trouble growing sales across the globe, and promotional spending does not appear to be helping. The firm remains impressively profitable and the stock continues to offer solid downside protection, but other firms look more appealing at current levels.

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First-Quarter Review
Net sales fell a slight 1.4% to just under $2.2 billion. The only segment to see positive sales was baking and snacking, which sells Pepperidge Farm brands in the U.S. and Arnott's biscuits in Australia. The other three business units experienced low single-digit top-line declines, with particular weakness in the U.S. and North American regions on the need for promotional spending to drive sales.

U.S. soup sales fell 5%, though beverage sales of V8 brands reported robust 10% growth on double-digit volume increases. International soup sales also suffered while the foodservice segment, which sells products to other food service firms and competes with similar divisions at archrivals Sara Lee (NYSE:SLE) and Unilever (NYSE:UN), saw sales decline 4%.

The biggest driver of profits is the U.S. soup, sauces and beverage segment. Quarterly profit in this unit declined 11% to make up almost 63% of total divisional operating profit of $469 million. The international unit selling the same items saw robust 16% profit growth but only accounted for 11% of the total. Baking and snacking profits were flat at $100 million while foodservice also saw a double-digit decline.

Subtracting out corporate overhead, company operating income fell 7.1% to $444 million. This was still a very healthy operating margin at 20.4% of sales. Higher interest expense helped send net income down 8.2% to $279 million, or 82 cents per diluted share.

Outlook
For the full year, Campbell's expects sales growth between 1% and 3%, and modest earnings growth of 2-4%. Based on last year's recurring earnings of $2.47 per share, this means approximately $2.57 in earnings per share if it hits the high end of its current guidance.

Bottom Line
The current guidance puts the forward earnings multiple at 13.2, which is slightly more reasonable than last quarter as the stock has trended down toward its lows for the year. The dividend yield is also appealing at 3.4%. However, worries about commodity cost inflation have pushed many consumer staple stocks into the bargain bin. As a result, firms such as Kellogg (NYSE:K) offer a more compelling mix of growth potential and low earnings multiples. Campbell's has proven much less adept at leveraging modest sales growth into higher annual levels of profits over time. (To learn more, see A Guide To Investing In Consumer Staples.)

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