What should investors make of a company whose signature product is associated with cold weather and yet that company could not make much headway during a rather cold and nasty winter? That is the dilemma for investors in Campbell Soup (NYSE:CPB) as this relatively specialized food company continues to struggle with growth.

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A Winter Of Discontent
Even though Campbell got more aggressive with promotions for the fiscal second quarter, and the weather should have helped, none of it seemed to matter to the top line. Overall revenue declined 1% as reported and missed the average estimate. Sales in the U.S. soup, sauce and beverage category fell 4% as reported, as did international sales. The baking/snacking business was a solid bright spot with 8% revenue growth, but as this unit contributes less than a quarter of the company's total revenue the outperformance only helps the company a little bit.

As sales fell short, so too did the company's profitability. Gross margin fell more than a point on the higher promotional activity. Although marketing and selling expenses declined a bit (the "promotional activity" impacted the sales and gross profit lines), earnings were nevertheless down 8%. Making matters worse, earnings quality was not great - though the company appeared to miss estimates by only a penny, Campbell paid less in taxes than analysts had forecasted, so results were actually worse on a relative basis.

The Road Ahead
To some extent, a disappointing quarter or two of growth at Campbell should not be a crisis. After all, this is a company with double-digit returns on assets and nearly a 20% return on invested capital. That's not at the level of Coca-Cola (NYSE:KO) or Pepsico (NYSE:PEP), but it is quite good for a company.

Unfortunately, the market pays best for growth and quality is often only a secondary consideration. Moreover, even a die-hard value investor is going to have some issues with a company that cannot grow. So while Campbell may do a better job of translating soup cans into profits or free cash flow than General Mills (NYSE:GIS), General Mills is moving more of its Progresso soup cans and sports a (slightly) better multiple.

With management now expecting flat revenue for the fiscal year, maybe the stage is set for low expectations for new CEO Denise Morrison. By the same token, how encouraged should investors be that the head of the worst-performing part of this business is now going to run the entire business? It would stand to reason that she was largely responsible for the unsuccessful promotional efforts in this quarter, so the question stands as to whether she has the ideas or skills to really get this business going in the right direction again.

But wait, there's more. The prices of metal, transport, energy, grain and vegetables are all heading higher and that's going to squeeze margins. While many companies are pushing input costs through to their customer, Campbell's performance suggests they can only do that to the extent that General Mills will let them.

The Bottom Line
Absent better than low single-digit revenue growth, Campbell just does not look interesting as a stock. Turnaround investors may see an opportunity for improvement here, but that's a risky play absent a clear strategy from new management. With somewhat better growth and improving free cash flow conversion, Kraft (NYSE:KFT) or Kellogg (NYSE:K) would seem like the better packaged food play at this time. (For more, see America's Biggest Food Companies.)

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Tickers in this Article: CPB, KO, PEP, GIS, KFT, K

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