Campbell Soup (NYSE:CPB) is still looking for the right recipe to boost its performance and has been for quite some time now. In more than half a decade, this well-known soup, beverage and snack company has grown its revenue by less than $200 million (or about 2%), despite a series of strategies targeting things such as new products, pricing and emerging markets.

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It's worth asking if Campbell Soup management is looking at the right targets, even now. It may simply be that soup is no longer a growth market and that product development and promotional efforts in this category are a waste of money. Said differently, if companies like Kraft (NYSE:KFT) and Kellogg (NYSE:K) see their futures in snack foods and ConAgra (NYSE:CAG) and Ralcorp (NYSE:RAH) in generics, Campbell Soup may be wasting shareholder capital on strategies that just can't work in the long run.

Nothing Particularly Tasty About Third Quarter Results
To be fair, investors and analysts understand that Campbell Soup is in the middle of a long-term turnaround attempt and there were no expectations of great near-term performance. Even still, the company only "beat" estimates because of a lower-than-expected tax rate.

Revenue moved up just slightly this quarter, as a modest price increase all but swallowed up volume declines and the impact of promotions. The Global Baking business did alright (revenue up 3%), but the soup business declined another 3%, despite an easy comp (down 7% last year). If there was a bright spot, it was in the 5% growth in the U.S. Beverage business.

Margins were disappointing, as promotion activity continues to chew up profits. Gross margin dropped almost two points, some due to promotions and some due to ongoing cost inflation. Operating income dropped 13%, with an even worse decline in the core U.S. soup/sauce/beverage operations, as a 13% increase in advertising and promotional spending compressed margins further.

SEE: A Look at Corporate Profit Margins

Soup Going Nowhere Fast
According to Nielsen data, soup has been weak for a while now, though the pace of the decline seems to be easing a bit. While the warm weather of this quarter is a convenient excuse for the declines, the soup category has been too weak for too long for that excuse to hold water.

Making matters slightly worse, Campbell Soup seems to be losing share in ready-to-serve to both General Mills (NYSE:GIS) and private label companies like TreeHouse Foods (NYSE:THS). The overall share loss (ready-to-serve and condensed) to General Mills hasn't been as bad as the loss to private label, but the fact remains that it's just a bad category.

I'm not sure exactly what management thinks they can do about this. The company has been talking for a while about making promotional activity more aggressive and discussed "disruptive" product introductions at the recent CAGNY, but I fear this is throwing good money after bad into a market that is stagnant at best. What's more, money spent propping up the soup business is money that isn't spent on the snack business - an area that better-performing companies like Kellogg, Kraft and PepsiCo (NYSE:PEP) see as a real future growth opportunity.

I'm also a little bothered by Campbell Soup's on-again/off-again international expansion efforts. After making a big deal a few years ago about the potential of the Russian market, the company has now backed away. Now not every foreign market is worth Campbell Soup's efforts, but Unilever (NYSE:UL) and Nestle (OTCBB:NSRGY) seem to be more in tune with what it takes to make a successful global food business.

The Bottom Line
As critical as I have been of Campbell Soup today, I'm not completely down on the company. It's hard to ignore a company with high teens return on invested capital, famous brands and a solid dividend. I just fear that management's current capital allocation strategy is flawed, and may lead to a less robust performance in the future.

Based on low single-digit free cash flow growth, I believe Campbell shares are trading more or less at fair value. I suppose conservative investors may find something to like here with the dividend and the perceived safety of the brand, but investors could do better with a little comparison shopping.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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