Tickers in this Article: CPB, CAG, GIS, THS, KFT, K, KO
Canned soup and snack food specialist Campbell Soup (NYSE:CPB) has a well-earned reputation as a defensive name with solid returns on capital. What it does not have, though, is much growth or momentum in the core business. While the company has taken some positive steps to improve its business possibilities, the incoming CEO has her work cut out to convince Wall Street that this is a must-own name in the food sector.

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Fiscal Q3 - Minimal Growth, But Solid Profitability
Campbell has been in a growth rut for a while and this quarter was no exception. Total reported revenue was up 1%, but revenue actually contracted about 1% on constant currency basis. Campbell's core business, U.S. soups, sauces and beverages, was down about 8% this quarter, with beverage sales down 9% (on a difficult comp) and soup sales down about 7%. Baking and snack food was a bright side, though, as sales rose 10% on strong performances from brands like Goldfish and Pepperidge Farm.

Campbell management deserves praise for maintaining profitability through this time. Gross margin fell about 80 basis points, which is actually pretty encouraging when considering the sort of price increases being talked about at suppliers like Silgan (Nasdaq:SLGN) (which supplies cans) and across the food sector from companies like Tyson (NYSE:TSN) and Dean Foods (NYSE:DF). (For more, see Cash In On Rising Food Prices.)

Campbell also did well through the operating expense items, as the company has pulled back on some of its marketing efforts. The net effect, then, was a 1% increase in operating earnings and a flat operating margin. As a result, the company ended up with an EPS number about 10% ahead of the average estimate.

Musical Chairs in the Marketplace
These aren't easy days in the branded soup business. Campbell, Del Monte Foods, and ConAgra (NYSE:CAG) are seeing shrinking volumes, while General Mills (NYSE:GIS) is treading water. Across the board, though, branded soup companies are losing share to private label soup makers like Treehouse Foods (NYSE:THS). It's hard to say if there is a long-term shift going on away from soup (it's not seen as a young person's market), but it seems pretty clear that there is still a move towards value.

Unfortunately, it is not as though business is free and easy in the snackfood business. Kraft (NYSE:KFT) and Kellogg (NYSE:K) are fierce competitors, though Campbell has the advantage of some very solid brands.

Where Will Campbell Go Next?
Campbell has decided to stop its aggressive discounting policies on soups, and that is probably a wise decision. In addition, the company's distribution relationship with Coca-Cola (NYSE:KO) has paid off in terms of improving the company's exposure to markets like Russia and outlets like C-stores.

The question, though, is what incoming CEO Denise Morrison can, or will, do to find new sources of real growth. The soup business may well be in cyclical decline, so it will be up to the company to create new flavors, brands, and products to expand the possibilities in businesses like beverages and snackfood. As befits the relatively conservative nature of the company, Campbell has been quiet during a period of a lot of M&A in the food sector, but perhaps the company will look to add a few brands here or there.

The Bottom Line - Still Simmering
Campbell is not a bad defensive name, but the valuation itself is not all that defensive. Investors should probably spend more time on names like Kellogg, Kraft, or Nestle, but long-term holders of Campbell stock should expect to continue seeing solid dividends without a lot of surprises. (For more, see America's Biggest Food Companies.)

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