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Shares of Campbell Soup (NYSE:CPB) have fallen some 7% over the past trading week. Investors are worried about the increase in debt and not so impressive results from the transformation strategy so far.

After witnessing solid year-to-date results, I will stay on the sidelines.

Fourth Quarter Results

Campbell Soup generated fourth quarter revenues of $1.82 billion, up 13.4% on the year before. Excluding discontinued operations, which encompass the European simple meals business, revenues came in at $1.72 billion.

The company reported a net loss of $158 million compared to a $127 million profit last year. The company took $275 million in charges from discontinued operations as it put its European simple meals business for sale, which resulted in large write-downs on goodwill.

As a result, GAAP net losses came in at $0.50 per share, while adjusted earnings came in at $0.37 per share, or $117 million.

Operating earnings of $0.43 per share came in a penny ahead of consensus estimates, and exclude $0.06 per share in restructuring charges.

CEO Denise Morrison commented on the developments, "Campbell made solid progress in fiscal 2013 as we executed our dual mandate to strengthen our core business and expand into higher-growth spaces. Our full-year sales and adjusted EBIT growth were consistent with our most recent fiscal 2013 guidance, and our EPS growth exceeded that guidance."

Looking Into The Results...

Revenue growth was entirely driven by a 13% contribution from recent acquisitions, notably that of Bolthouse.

Adjusted gross margins which exclude restructuring charges, came in at 36.7% which is down 230 basis points on the year before, driven by lower margins at Bolthouse Farms. Cost inflation which ran at 3% was offset by productivity improvements.

Absolute marketing and selling expenses remained unchanged, despite the revenue growth. Lower expenditure on sales and marketing efforts at core operations was offset by the addition of Bolthouse.

...And Forward

Full year continuing operations are expected to show 5 to 6% revenue growth. Adjusted earnings per share are seen up between 3 and 5%, driven by the extra week in the coming fiscal year.

Acquisitions are expected to add $300 million in sales and earnings per share of $0.02, compared to last year.

Valuation

Campbell Soup ended the fiscal year of 2013 with $333 million in cash and equivalents. Total debt stood at $4.45 billion, for a net debt position of roughly $4.1 billion.

Campbell generated full year revenues of $8.05 billion, up 12.2% on the year before. Net earnings fell by 41% to $458 million. GAAP earnings per share came in at $1.44 per share, while reporting adjusted earnings of $2.17 per share.

Trading around $43 per share, the market values Campbell Soup at $13.5 billion. This values assets at 1.7 times annual revenues and 20 times adjusted earnings.

Campbell Soup pays a quarterly dividend of $0.29 per share, for an annual dividend yield of 2.7%.

Some Historical Perspective

Over the past decade, shares of Campbell Soup have traded within a $25-$40 trading range. Since the start of the year, shares have risen from $35 to highs of $49. After the recent correction, Campbell trades around $43 per share.

Between the fiscal year of 2010 and 2013, Campbell increased annual revenues by a cumulative 5% to $8.05 billion. Net income fell by 46% to $458 million, largely but not solely on the back of charges related to discontinued operations.

Investment Thesis

The world's largest soup maker has been transforming its business at a quick pace in recent times. Shareholders have applauded the move, sending shares up 25% so far this year, even after factoring in a recent 10% correction.

The strong sales of soups and sauces has been led by turnaround efforts initiated by CEO Denise Morrison. The company has been revamping soups and sauces to battle weak sales in recent years.

The company furthermore bought Bolthouse Farms in a $1.55 billion deal to achieve a presence in salad dressings. Campbell furthermore bought baby food producer Plum Organics and Kelsen which produces cookies.

While recent momentum has spurred sales growth over the past quarters, it is expected to come under pressure in the current quarter. The US soups business reported growth of just 4%, down from 14% in the past quarter. The core operations are important, making up a third of total revenues, while profitability is superior. Another weak spot is in the US drink business as V8 vegetable juices faced increased competition from energy drinks and packaged fresh juices.

Back in September of last year, I took a look at Campbell Soup's prospects. I concluded that the company is a perfect long-term addition for dividend hunters. Ever since, shares have seen a nice rally from levels around $35 to current levels at $43 per share.

I concluded that investors should applaud the shareholder-friendly strategy driven by share repurchase programs and a solid dividend yield which has fallen to 2.7% at the moment.

While investors applaud Campbell's move I am a bit skeptic. The three acquisitions will bolster annual revenues by about $1 billion, partially offset by revenues of the European activities which will reduce revenues by roughly half that amount. The deals are part of the dual mandate of Morrison, focusing on higher growth areas and focus on the core.

For now the strategy is resulting in increasing debt levels, restructuring charges and fat investment banking fees. While the long-term growth prospects might be enhanced, it is a bit early in the game to see. The valuation at 20 times earnings is a bit rich, yet investors receive a nice 2.7% dividend yield. Yet the increase in leverage might limit share repurchase activity or dividend hikes going forward.

I remain on the sidelines.

Source: Campbell Soup - Transformation Pace Is Slowing As Debt Keeps Increasing