Legendary investors such as Warren Buffett and Peter Lynch advise investors to buy the stock of companies that they know well. Entire books have been written about this art of investing in the companies whose products one sees selling well at the local mall or the corner grocery store. A recent article in Real Simple magazine leads investors to soup companies such as Campbell's (NYSE: CPB) and SoupMan (NASDAQ: SOUP.OB).
In the article "Winter Soups" in the January 2013 issue of Real Simple, a quick look at the ingredients for the recipes reveals that the main base for each is something as cheap as water. Like Coca-Cola (NYSE: KO), that should lead to very impressive margins. It does for soup, as Campbell's profit margin is about 50% higher than that for other packaged food companies such as Hormel (NYSE: HRL), the maker of Spam and other meat products, and comparable with that of Heinz (NYSE: HNZ) (as all investors know, Heinz is the latest Buffett acquisition for the portfolio of Berkshire Hathaway (NYSE: BRK.A).
Unlike Hormel and Heinz, soup companies such as Campbell and Soupman can appeal to a high end clientele. Campbell's has moved in this direction with a major rebranding campaign featuring new packaging and flavors. For Soupman, it is already there as it is the product from the legendary "Soup Nazi" episode of the venerable comedy series, "Seinfeld."
Going for the high margin companies is the best way to invest in a sector. There is no need for Buffett to buy shares of fast food giants such McDonald's (NYSE: MCD) or Yum! Brands (NYSE: YUM) as he already owns shares of Coca-Cola. Served on the menus of many fast food chains such as McDonald's, the profit margin of Coca-Cola is much higher than the restaurant serving it.
The same holds true for investors looking to profit from the increase in consumer spending around the world. Not only does Campbell's have a higher profit margin than Hormel or Heinz, it has a higher profit margin than consumer giants that sell massive quantities of packaged foods such as Wal-Mart (NYSE: WMT) and Safeway (NYSE: SWY). While the profit margin for Campbell is more than 9%, for Wal-Mart it is just 3.48%, and for Safeway, just 1.28%.
Soup companies such as SoupMan and Campbell also have more pricing power. The gross margin for Campbell's is 37.16%, just higher than that for Heinz of 36.57%. For Safeway, it is just 26.61%. Wal-Mart has a gross margin of 24.87%, with Hormel's being only 16.11%.
Overall, the purchases of soup should start to rise again based on the growth in consumer spending around the world.
Campbell's sells products in more than 120 countries. Just two countries, Russia and China, account for more than 50% of global soup consumption. As consumer spending evolves in China, packaged foods will be more in demand. That will be the same tale in emerging markets around the world, as McKinsey & Co. expects there to be one billion more joining the consumer class in China, India, Russia and others in this segment.
While Campbell's should have a broad appeal to the global masses, SoupMan should do well with the affluent, urban niche. After all, "Seinfeld" was named the greatest television program of all time by TV Guide, and it is seen around the world. Like Coach (NYSE: COH), Ralph Lauren (NYSE: RL) and Michael Kors (NASDAQ: KOR), SoupMan should have a "Gingham Style" appeal due to the "Seinfeld" factor. For those who like a little income to thicken up their investing in soup stocks, Campbell's has a dividend yield of 2.70%.