Campbell's Soup: Tasty, But Not Worth the Investment Risk

| About: Campbell Soup (CPB)

I grew up with this company quite literally inside me.

It didn't matter that I was sick or not, that the heat of a summer afternoon was sucking the life out of me, or that Walt Wedbush beat me at indian ball. It simply didn't matter.

What mattered was getting my bowl of Campbell's soup for lunch, Campbell's Chicken with Rice soup to be specific.

Sure there were other delicacies to be had, SpaghettiO's for example were awfully good especially when eaten with Ritz crackers. And on rare occasions there was the crème de la crème of canned foods, Chef Boyardee Lasagna served with Vienna Sausages.

But when all was said and done, it was what I used to think of as the working man's soup, Campbell's, that I looked forward to having for lunch.

Why all of this nostalgia? A valuation worksheet request for Campbell's Soup Company (NYSE: CPB) from a long time friend. One I had grown up with. One that had beaten me at indian ball many times.


Financial information presented in this report for Campbell's Soup Company is based on the company's most recent SEC Form 10-K filing for year ending July 30, 2010, as filed with the Security and Exchange Commission on September 29, 2010.

What They Do

The company is a global manufacturer and marketer of branded convenience food products, reporting in the U.S. Soup, Sauces and Beverages segment, the Baking and Snacking segment, the International Soup, Sauces and Beverages segment, and the North America Food Service segment.

Popular brands include Swanson, Prego, Pace, V8, and Pepperidge Farms.

Short-Term Investment Considerations

The stock closed recently at $34.94, with first resistance at $35.64, a 2% increase from its recent close, second support at $37.59, an 8% increase from its recent close, first support at $34.65, a 1% decline from its recent close, and Second Support at $32.73, a 6% decline from its recent close.

The stock price has been drifting downward since the first week of November, which is not a trend investors want to see in the middle of a market that is racing ever upward into oblivion.

With the trend line falling, stochastic just reaching oversold, the MACD flat, daily volume seemingly on the decline, and the resistance and support spreads not worth yawning over, there simply does not seem like much for short-term investors to get to excited about.

Long-Term (5 Year Hold) Investment Considerations

There is no easy way to put this, but for a company that has been around 140 years, their financial statements are simply not impressive.

The company's current ratio of 0.82, quick ratio of 0.37, and cash ratio of 0.12 are less than half of what we consider investment quality.

Couple those metrics with 39% of the company's total assets being comprised of goodwill and intangibles, that debt exceeds fixed assets by 36%, and that the company spent almost 80% more on stock repurchases than on debt reduction, and you have to management even there?

Certainly all is not negative. The company's free cash flow to sales margin is 17.5%, meaning that for every dollar in sales the company has, $0.175 ends up contributing to free cash flow, and return on invested capital was a very respectable 44%.

Then there's the elephant in the room, debt. The company ended FY10 $2.78 billion in debt. As the matter of fact, debt was 3 times greater than equity and more than 10 times greater than available cash. Also during FY10, the company added a net $135 million of debt to the books.

Regardless of the business reasons for this addition, we simply don't believe that management is taking an entrepreneurial approach to its business. Instead of working out a plan to reduce the company's debt, management is concerned about strategies for advancing a "powerful commitment to substitutability and corporate social responsibility", and strengthening its business "through outside partnerships and acquisitions".

We believe instead of all of this fondue conversation, the company needs a hard core plan that focuses on debt reduction, or it needs new management.

Value Considerations

Based on our review of the FY10 financial information for Campbell's Soup Company, our reasonable value estimate for the stock is $30-$31, with a buy target of $18, a first sell target of $36, and a close target of $38.

The stock has a trailing twelve month PE of 14 and forward looking PE of just under 13, putting the current stock price in fair value territory.

Considering that current price levels are at fair value, and that other financial metrics are not what we consider investment quality, we believe there would be additional risk adding the company to our portfolio at this time.

Final Thoughts

With springtime just around the corner, I find myself wondering what ever became of Walt and some of the other kids I grew up with. I suppose I have the usual questions; did they marry, do they have kids, what sort of jobs they have, what do they do for fun, that sort of thing.

I wonder if Walt still likes spring? I remember one day out of the blue he said, he really liked spring. I couple probably find most of that childhood gang via the internet were I really all that curious, but then, I've never been one to look backwards.

Over the years I have come to understand that investing is much the same way. You buy an equity with the hopes of that purchase remaining in your portfolio for a very long time and of course, making you piles and piles of money.

But life, and the markets, tend to get in the way. And when they do, as individual investors we seem to become reactive instead of proactive, often costing ourselves money and making us wish we had done something other than what we did.

But alas there are no do overs in life, we just have to live with the decisions we make and move on from there.

As to Walt, in his mind the best indian ball player that ever lived? Well, it turns out that he became president of some major oil company and is now retired and thinking of buying all of southern California, a place he says soup and springtime happen everyday.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.