Campbell�s Soup Company (CPB) by prw4sQv

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									Campbell Soup Company (CPB)                                                     Michael C Schneider
Date:                             9/20/02             Consensus Estimate 9/02A       7/03E      7/04E
Sector:                     Consumer Non cyclical     EPS                    $1.23    $1.44      $1.54
Industry:                     Food Processing         P/E                    17.95    15.99      14.30
Current Price:                      $22.03            Long Term Growth Rate:               8.00%
52 Wk Price Range:              $31.44-$21.00         Ratio Analysis    Co.   Indus.   Sector SP500
Ave. Daily Vol:                    849,300            P/E (TTM)        17.95   23.45   24.55      25.15
Beta:                                 .42             P/S (TTM)        1.54     1.52    2.58       2.84
Market Cap ($Billion):               $9.04            P/B (MRQ)        117.2    5.25    7.27       4.39
Shares Out (million):                 409             ROA (TTM)        8.75     6.85   10.66       6.10
Inst. Hold %:                        32%              EBO Valuation                              $39.51
Div Yld:                              2.90            Recommendation:                              Hold
Total Debt/Equity:                    8.9             Stop-loss Price:                           $17.62
Member S&P 500?                       Yes                               Price     6-mo prob    12-mo prob
                                                      Target Price     26.50        30%           44%

                Investment Thesis                                             Summary
                                                        Fundamental Valuation:
 Campbells has not missed a dividend since 1902.          Positive: Based on a discount rate of 6.5%,
                                                           Campbell’s EBO evaluation is nearly 1.8 times
 According to Campbells CEO, the new                      the current price.
  refocusing strategy is working.
                                                        Relative Valuation:
 Recent purchase of Unilever, the UK’s largest            Negative: based on PEG, P/B, Value, and P/S,
  manufacture of soups and sauces, has the                 Campbells appears bearish compared to its
  potential to increase sales $400 million.                competitors.

                                                        Technical Analysis:
 Campbells has repurchased 49 million shares of
                                                           Negative: Most of the indicators were negative
  common stock since 1997 with 12 million of
                                                           although it appears that the price may have
  those repurchased shares repurchased in 2002.
                                                           bottomed it also seems to be floundering.
 Campbells recent spin off of non-core and             Earnings Analysis:
  unprofitable products such as Vlasic pickles and         Neutral: The past year has had two quarters with
  Swanson frozen foods.                                    positive earnings surprises, but analysts seem
                                                           split on which direction Campbells earnings are
 Debt to Equity looks skewed due to stock                 moving.
  repurchases.
                                                        Analyst Recommendations:
 Annual sales are expected to grow at a rate of no        Negative: The mean recommendation is toward
  less than 2-3% per year.                                 hold.

 Sales for ready to eat soups are up 9% in 2002.       Institutional Ownership:
                                                            Mixed: More institutions have sold but a number
                                                            of institutions have purchased all that was sold.




                                                                                                         1
Company Summary
History: Campbell Soup Company began in 1869 when a fruit merchant Joseph Campbell and an Ice Box
manufacturer named Abraham Anderson joined to can tomatoes and minced meats. The company hit
another milestone in 1897 when a young chemist working for the company developed a way to take the water
out of soup to make condensed soup. This revolutionary new process saved the company money in shipping,
storage and packaging. Then in 1930 Campbells introduced that chubby little kid on the label and the “Mmm
Mmm Good” slogan on the radio. The way Campbell’s products have been marketed goes deep into
American history. “Celebrities from Ronald Reagan and Johnny Carson to Jimmy Stewart, Orson Welles,
Helen Hayes, Donna Reed, Robin Leach, George Burns, and Gracie Allen have served as spokespeople for
various Campbell products.” Also generations of Americans have grown up on “Campbell-sponsored
programming including Lassie and Peter Pan.” Campbells has also been a long time supporter of education
starting such programs as “Labels for education.”
Company Summary: “Campbell Soup Company is a global manufacturer and marketer of high quality soup,
sauces, beverage, biscuits, and confectionery and prepared food products. The company owns a portfolio of
more than 20 market-leading businesses each with more than $100 million in sales. They include
“Campbell’s” soups worldwide, “Erasco” soups in Germany and “Liebig” soups in France, “Pepperidge
Farm” cookies and crackers, “V8” vegetable juices, “V8 Splash” juice beverages, “Pace” Mexican sauces,
“Prego” pasta sauces, “Franco-American” canned pastas and gravies, “Swanson” broths, “Homepride”
sauces in the United Kingdom, “Arnott’s” biscuits in Australia and “Godiva” chocolates around the world.
The company also owns dry soup and sauce businesses in Europe under the “Batchelors,” “Oxo,” “Lesieur,”
“Royco,” “Liebig,” “Heisse Tasse,” “Blå Band” and “McDonnells” brands. The company splits these
products into four divisions listed below.” 1
                                                                       % Operating   Operating
Division                                          Operating Revenue     Revenue      Earnings    % Net Income
North American Soups Away From Home                           $2,134        43.46%         $553         64.60%
North American Sauces and Beverages                             $908        18.49%         $180         21.03%
Biscuits and Confectionery                                    $1,164        23.71%         $150         17.52%
International Soups and Sauces                                  $704        14.34%           $70         8.18%
Corporate Eliminations                                                                      -$97       -11.33%
Total                                                        $4,910                        $856


Competition and Strategy
Campbell’s is refocusing their business strategy. They currently are at the end of the first year of a three-year
turn around plan. The plan calls for a refocus on Campbell’s core business condensed soups and juices. The
plan included the spin off of Swanson frozen foods and Vlasic pickles. The plan also involves heavy increased
marketing costs (marketing costs increased 17%). The desired result of which will be significant brand
building and a higher quality image. The new plan also calls for flavor improvements in condensed soups. In
order to improve the soup’s flavor Campbells is purchasing new cooking equipment for their factories that
will cook soups longer at a lower temperature. Currently this has been implemented in their ready to eat
vegetable soups. Sales for ready to eat soups, such as Select and Chunky are up 9% on the year. Campbells
has also been expanding in the global market, namely the UK with the purchase of the UK’s leading soup and
sauce maker, Unilever N.V. Unilever has annual sales of over $400 million. Soup international soup sales are
up 1% in 2002. 1
Competition: Kraft foods is Campbells strongest competitor, due to Kraft’s large contracts with big retail
grocery and convenience chains such as Wal-Mart. Kraft competes with Campbells in the convenience food
market, especially in the dried packaged foods. Kraft has an extensive marketing campaign that reaches
children. Campbells marketing has focused primarily on mothers with children and not on children
themselves. Kraft’s younger image has been successful at fending off Campbell’s older more nostalgic image.
2



1   www.campbells.com

2   Company Summary multexinvestor.com


                                                                                                                 2
Tyson Foods is a competitor in the convenience food industry focusing on frozen foods. Tyson foods
however has been moving more towards providing foods products for airlines and restaurants. Tyson also
provides a different kind of convenience product, in frozen chicken products. Tyson rears its own chickens
and seems to be expanding its core business into beef and pork raising as well. 3
Hormel Foods Products is a large producer of meat convenience food products and canned products.
Hormel produces pre-cooked and pre-packaged meats. Hormel has been very successful in Mexico, China,
Spain and the Philippines. Hormel has had success in reaching these across ethnic boarders by introducing a
variety of products familiar to its international customers. For instance a product known as The House of
Tsang has been very popular in the Chinese market.4 Campbell’s de Mexico was established in 1963 and has
been a significant marketer of and manufacturer of cultural specific canned goods. For instance two popular
creamed soups in Mexico are Chile Pablano and Squash Flower. Campbells also provides frozen vegetables
and a variety of juices to Mexico. 5
Kellogg’s food company a manufacturer of convenience foods for breakfast, did not directly compete with
Campbells until 1999, when Kellogg’s acquired Worthington Foods. Worthington Foods specializes in pre-
packed vegetarian items, such as frozen vegi-burgers. 4
Campbells also faces competition from store brands. These brands compete against Campbell’s soups, sauces,
confectioneries, and beverages. These brands often receive more favorable shelf space closer to the ends of
isles. Store brands like Sam’s choice of Wal-mart and Safeway Select have cut into Campbell’s soup and juice
market.




Historical Revenue and Earnings:

                       Historical Revenue (in millions)                   Historical Earnings Per Share
                     FY              FY              FY                FY              FY              FY
                    07/02           07/01           07/00             07/02           07/01          07/00
1st Quarter         $1,729         $1,778           $1,768            $0.42           $0.47           $0.54
2nd Quarter         $1,810         $1,957           $1,916            $0.49           $0.65           $0.65
3rd Quarter         $1,371         $1,439           $1,394            $0.23           $0.30           $0.32
4th Quarter         $1,223         $1,490           $1,189            $0.13           $0.13           $0.13
Total               $6,133          $6664           $6,267            $1.27           $1.55           $1.64


Earnings declined in 2002 despite Campbell’s transformation plan. However historical EPS in the fourth quarter
remained the same.




3
  www.tysonfoodsinc.com
4
  www.multexinvestor.com
5
  www.campbellsoupcompany.com




                                                                                                                 3
I.            Fundamental Valuation

Cambells Soup Co.       PARAMETERS                             FY1       FY2      Ltg
as of 9/20/02           EPS Forecasts                             1.44     1.54    8.00%            Model 1: 12-year forecasting horizon (T=12).
                        Book value/share (last fye)               0.33                                          and a 7-year growth period.
                        Discount Rate                           6.50%
                        Dividend Payout Ratio                  49.37%
                        Next Fsc Year end                        2003
                        Current Fsc Mth (1 to 12)                    2
                        Target ROE (industry avg.)             30.07%

                        Year                                     2003      2004     2005     2006         2007       2008        2009       2010    2011     2012     2013     2014
                        Long-term EPS Grow th Rate (Ltg)                          0.0800   0.0800       0.0800     0.0800      0.0800
                        Forecasted EPS                            1.44     1.54     1.66     1.80         1.94       2.10        2.26
                        Beg. of year BV/ Shr                     0.325    1.054    1.834    2.676        3.586      4.568       5.629
                        Im plied ROE                                      1.460    0.907    0.671        0.541      0.459       0.402

ROE                     (Beg. ROE, from EPS forecasts)           4.425    1.460    0.907    0.671        0.541      0.459       0.402      0.382    0.361    0.341    0.321    0.301
Abnorm al ROE           (ROE-r)                                  4.360    1.395    0.842    0.606        0.476      0.394       0.337      0.317    0.296    0.276    0.256    0.236
grow th rate for B      (1-k)*(ROEt-1)                           0.000    2.241    0.739    0.459        0.340      0.274       0.232      0.204    0.193    0.183    0.173    0.163
Com pound ed grow th                                             1.000    3.241    5.637    8.224       11.019     14.038      17.298     20.818   24.842   29.389   34.466   40.067
growth*AROE                                                      4.360    4.522    4.745    4.986        5.246      5.526       5.829      6.594    7.365    8.118    8.822    9.444
required rate (r)                                   0.065        0.065    0.065    0.065    0.065        0.065      0.065       0.065      0.065    0.065    0.065    0.065    0.065
d iscount rate                                                   1.065    1.134    1.208    1.286        1.370      1.459       1.554      1.655    1.763    1.877    1.999    2.129
d iv. payout rate (k)                               0.494
Ad d to P/ B            PV(grow th*AROE)                          4.09     3.99     3.93     3.88         3.83       3.79        3.75       3.98     4.18     4.32     4.41     4.44
Cum P/ B                                                          5.09     9.08    13.01    16.88        20.71      24.50       28.25      32.24    36.41    40.74    45.15    49.59
    Ad d : Perpetuity
  beyond current yr     (Assum e this yr's AROE forever)         62.99    61.34    60.43    59.62        58.90      58.27       57.71      61.30    64.29    66.53    67.89    68.24
Total P/ B              (P/ B if w e stop est. this period )     68.08    70.42    73.44    76.51        79.61      82.77       85.96      93.53   100.70   107.27   113.04   117.83
Implied price                                                    22.39    23.16    24.16    25.16        26.19      27.22       28.28      30.77    33.12    35.28    37.18    38.76

Check:
Beg. BV/ Shr                                                      0.33     1.05     1.83     2.68         3.59       4.57        5.63       6.77     8.08     9.56    11.22    13.04
Im plied EPS                                                      1.44     1.54     1.66     1.80         1.94       2.10        2.26       2.59     2.92     3.26     3.60     3.92
Im plied EPS grow th                                                      0.069    0.080    0.080        0.080      0.080       0.080      0.143    0.130    0.117    0.103    0.089



Inputs:

      1. EPS Forecasts and long-term growth rate (LTG) are from Multex Investor (9/29/02).
      2. Book value per share derived from 7/30/01 Balance Sheet (reclassified on 7/29/02) by
         dividing total equity of 132 million by 421 million shares outstanding to get $.33 (This
         indicator may be unreliable as Campbells has been spending excess RE on stock buy backs.
      3. Discount rate: Used 20 year t-bond rate as of (8/01/02) of 5.54%. for the risk free rate, an
         expected return on the market of 8% and Campbell’s beta of .42 (from Multex) yielding a
         CAPM discount rate of 6.5%. (=.54 + .42(.08-.054))
      4. Dividend payout ratio is the trailing 12 months as reported by Multex.
      5. Next fiscal year-end is July 2003
      6. Current fiscal month is 2.
      7. Target ROE=30.07% as reported by Multex.

Output and Sensitivity Analysis:
   1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the
       EBO valuation is $38.76.
   2. Changing the discount rate to 10% (=3.5%) the price decreases to $20.78.
   3. Changing the growth rate to 10% (+2%) increases the EBO valuation to $41.27. While
       changing the growth rate to 5% changes the EBO valuation to $35.33.
   4. Changing the industry ROE to 11.05% lowers the EBO valuation to $16.68, while raising
       the ROE to 40% raises the EBO valuation to $53.01.

Given the current price of 22.27 the EBO valuation model yields a 9.5% discount rate.




                                                                                                                                                                      4
II. Relative Valuation
Comparables
                                                          Mean FY2
                                                       Earnings Estimate Forwar Mean LT     PEG       P/B      ROE      Value
                                                                            d
  Ticker Name                    Mkt Cap Current Price (next fiscal year) P/E Growth Rate            (MRQ)    5 yr ave Ratio    P/S
1 TSN Tyson Foods, Inc.         4,195,500,5  11.88            1.14        10.42  10.00%      1.04     1.19     6.91%   0.17     0.17
                                     00
2 K       Kellogg’s             13,615,180,  33.20            1.90        17.47   8.53%      2.05    12.58    53.13%    0.24     1.40
                                    000
3 KFT     Kraft Foods           63,327,500,  36.50            2.26        16.15  12.98%      1.24     2.71    30.07%    0.09     1.99
          International             500
4 HRL     Hormel Foods          2,997,550,0  21.59            1.63        13.25  10.33%      1.28     2.84    18.03%    0.16     0.75
                                     00

    CPB   Campbell              9,135,160,0   22.27         1.54        14.46    7.16%       2.02    112.85   151.24%   0.75     1.49
                                    00

          Implied Price based on:                                       P/E                  PEG     P/B                Value P/S
1   TSN   Tyson Foods, Inc.                                            $16.05               $11.49   $0.23              $5.14 $2.54
2   K     Kellogg’s                                                    $26.91               $22.59   $2.48              $7.07 $20.88
3   KFT   Kraft Foods International                                    $24.87               $13.72   $0.53              $2.69 $29.68
4   HRL   Hormel Foods                                                 $20.40               $14.14   $0.56              $4.70 $11.19

          High                                                         $26.91               $22.59   $2.48              $7.07   $29.68
          Low                                                          $16.05               $11.49   $0.23              $2.69   $2.54
          Median                                                       $22.63               $13.93   $0.55              $4.92   $16.03




Indicator                                                         Interpretation
P/E                         Neutral - Compared to Kraft and Kellogg’s Campbells P/E looks bullish but compared
                            to Hormel and Tyson Campbells P/E looks bearish. This implies that Campbells is (1)
                            fairly valued or, (2) expected to grow faster than Tyson and Hormel but slower than
                            Kraft and Kellogg’s, or (3) the market believes Campbells to of average risk.

PEG (P/E/G)                 Bearish – Campbell’s PEG is higher than that of its competitors, implying that it may
                            be overvalued.

P/B                         Bearish – P/B is substantially higher than competitors, this indicates a very low book
                            value.

Value (P/B/ROE)             Bearish – After adjusting P/B for historical ROE differences, Campbells has a
                            substantially higher value ratio. It is possible that the market expects a much higher
                            ROE from Campbells than its competitors.

P/S                         Bearish – P/S is greater than most of its competitors (except craft).

Summary                     Comparisons seem to point to a bearish indicator. Forward indicators (P/E and PEG)
                            look about average or relatively fair where as P/B looks expensive and P/S looks about
                            average again.




                                                                                                                5
III. Technical Analysis




.




Indicator                                                 Interpretation
Bollinger Bands     Bearish –at the center heading toward the bottom band.
Stochastics         Bearish - %K =44.48, %D = 46.08. Since K is below D the indication is towards
                    Bearish.
Moving Averages     Bearish – Price Fell below the lower moving averagve. Although there have been a
                    couple of bearish indicators in the past 90 days the price seems to be falling again.
MACD                Bearish- A negative MACD is a Bearish indicator, but the price is above the line now
                    so that may be a buy indicator.
Regression          Bearish - The breakout above the line suggests that the market is oversold, and
                    probably not a buying opportunity.
Momentum            Bullish – If the price has reached a low; the bottoming out of the momentum line
                    could indicate a buying opportunity. Although it could continue as a trend and be a
                    bearish indicator as well.




                                                                                                  6
IV. Earnings Analysis
                                            Earnings Surprises
                       July 02        April 02:         January 02      October 01         October 01
                      (Last qtr)    (2 qtrs prior)     (3 qtrs prior)  (4 qtrs prior)     (5 qtrs prior)
Estimate                 .14             .23                 .49            .41                .17
Actual                   .14             .24                 .50            .42                .15
Difference                0              .01                 .01            .01                -.02
                                       Mean Earnings Estimates
                  October 2002:      January 03:       July 03: Next   July 04: Next       LT Growth
                   This Quarter     Next Quarter        Fiscal Year     Fiscal Year           Rate
Earnings                .44              .54                1.44            1.54               7.6
# Estimates              11               10                  14              6                 12
                            Earnings Per Share Estimates Revisions Summary
                                               Last Week                         Last 4 Weeks
                                     Revised Up       Revised Down      Revised Up       Revised Down
Quarter ending 10/02                       0                   0              4                  4
Quarter ending 01/03                       0                   0              1                  2
Year ending 07/03                          0                   1              5                  5
Year ending 07/04                          0                   0              0                  1

Campbell’s has experienced minor positive earnings surprises in 2 out of the previous 3 quarters.
Analysts have been skeptical of Campbell’s potential for earnings and growth. These minor surprises
probably won’t affect the stock price too much.

The forecasted earnings for fiscal years 04 and 05 seem reasonable given Campbell’s slow expected
long-term growth. Although a few analysts put the growth rate over 12% most do not. Since 1997
Campbell’s has been using a good deal of its retained earnings to repurchase stock (over 49 million
shares). Keeping this trend in mind the EPS forecast is reasonable.

Given the earnings revisions over the last four weeks it would appear that analysts are splitting on
which way the company is headed.




                                                                                                       7
V. Analysts’ Recommendations
                       Current               1 Month Ago          2 Months Ago          3 Months Ago
Strong Buy                0                       1                     1                     1
Buy                       2                       4                     4                     5
Hold                     10                      14                    15                    16
Underperform              1                       1                     1                     2
Sell                      1                       1                     1                     1
No Opinion                0                       6                     7                     7
Mean Rating             3.07                    2.86                  2.86                  2.88


With fewer analysts reporting in on the stock the overall opinion seems to be steady. Analysts
recommend a hold with a fewer recommending a buy than in recent months. This is not surprising
since earnings are down for this year, although the EPS is consistent for the fourth quarter.




                                                                                                 8
VI. Institutional Ownership
                                     # Holders        % Beg. Holders       # Shares (000)         % Shares
Shares Outstanding                                                          409,859.595           100.00%
Ending institutions                     301               100.67%           130,745.211            31.90

# New Buyers                             29                9.7%
# Closed Positions                       31               10.3%
# Buyers/3 Mo. Shares Purch.            125               41.8%              11,499.089             2.8%
# Sellers/3 Mo. Shares Sold             142                47.5               7,595.957            1.85%
Beg. Total Inst. Positions              299               109.3%             126,842.079           32.85%

# Net Buyers/3 Mo. Net Chg.               2                -8.63%             3,903.132             .95%

Although more institutions closed positions than purchased new positions, the change was minimal.
It also appears that while slightly more institutions are decreasing positions in Campbell’s those
increasing their position are purchasing more shares than those being sold by other institutional
investors. The results are mixed but leaning toward positive. It would appear that the institutions are
siding with the analysts and splitting on their position as well.




                                                                                                          9

								
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