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Here is a look at how Campbell Soup Company (NYSE:CPB) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value$28.56
MG OpinionOvervalued
Value Based on 3% Growth$34.15
Value Based on 0% Growth$20.02
Market Implied Growth Rate4.84%
Net Current Asset Value (NCAV)-$16.30
PEmg18.18
Current Ratio0.63
PB Ratio9.97

Balance Sheet - 9/30/2013

Current Assets$2,587,000,000
Current Liabilities$4,104,000,000
Total Debt$2,247,000,000
Total Assets$9,055,000,000
Intangible Assets$3,655,000,000
Total Liabilities$7,706,000,000
Outstanding Shares314,000,000

Earnings Per Share

2014 (estimate)$2.42
2013$2.17
2012$2.43
2011$2.42
2010$2.42
2009$2.04
2008$1.76
2007$2.08
2006$1.82
2005$1.71
2004$1.57

Earnings Per Share - ModernGraham

2014 (estimate)$2.36
2013$2.31
2012$2.33
2011$2.23
2010$2.10
2009$1.92

Conclusion:

Campbell Soup Co. is an average company that does not qualify for either the Defensive Investor or the Enterprising Investor. The failings for the Defensive Investor include: the current ratio is too low, there has not been sufficient growth in earnings over the ten year period, and the company trades at a high PB ratio. As for the Enterprising Investor, the level of debt relative to the current assets is too high. Therefore, value investors seeking to follow Benjamin Graham's methods should seek other opportunities by reviewing companies that do pass these requirements.

As for a valuation, the company has grown EPSmg (normalized earnings) from $1.92 in 2009 to an estimated $2.36 for 2014. This level of growth does not support the market's implied estimate of 4.84%, indicating the company may be overvalued at the present time.

What do you think? Do you agree that Campbell Soup Co. is overvalued? What would be your assessment? Is the company not suitable for Defensive Investors or Enterprising Investors?

Disclosure: The author did not hold a position in Campbell Soup Co. (CPB) at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Valuation Of Campbell Soup Company