Campbell Only Suitable For Patient Income Investors

| About: Campbell Soup (CPB)

This analysis of Campbell Soup Company (NYSE:CPB) continues a series on the major food companies and pits it competitively against Hormel (NYSE:HRL). It should be noted that Hormel expressed concern about rising pork prices in its latest earnings report, which is going to be an issue for all companies in this sector over the next couple years.

Campbell is an integral part of America's pop culture. Just ask Andy Warhol, whose iconic painting of a soup can immortalized the brand. Other offerings include Prego, Pace, Swanson, V-8 and Pepperidge Farm. Campbell recently launched a new commercial advertising campaign to update the image. I'm reminded of the old Nestea plunge commercials, which makes me think the company wants consumers to remember soup can be refreshing as well as hot and healthy.


Earnings per share have averaged growth of 11.2% annually for the last three years but as you can see below, the trend fell off hard after 2007. Like the other food companies I've profiled so far, while gross margins have been pressured by rising input costs, net margins have risen slightly to compensate. Campbell's margins are about double the average for the industry. The question going forward is, will earnings per share struggle while margin pressures intensify?

Campbell's Earnings per Share





















In a mid-February earnings report, the company reported a small decline in both revenues and earnings year over year. Guidance was weak and the company remains in turnaround mode.


Great businesses typically generate strong cash flows and require little debt financing. I like to see long-term debt less than three times current net earnings. With long-term debt of $2.4 billion and trailing 12-month net income of $786 million, Campbell squeaks by. At $484 million, their cash position is significantly better than it was just a couple years ago.

Return on Equity

Companies that consistently deliver high returns on equity create the true wealth for shareholders. Average businesses typically offer a 12% return on equity while great businesses return over 15%. In Campbell's case I've gone with the return on invested capital metric instead since it includes the use of debt.

Campbell's Return on Invested Capital (rounded)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
- 16% 16% 17% 17% 19% 30% 20% 24% 20%

Campbell's 10-year average ROIC is 20%.

The Dividend

Campbell currently offers a 3.6% yield supported by a 48% payout ratio. It has increased its dividend annually for seven straight years at an average 9.4% clip over the last five years. At this point in time, the dividend is clearly the most attractive part of an investment in Campbell.

Retained Earnings

I want to own companies that are free to reinvest retained earnings at high rates of return. What I don't want to see is high research and development costs or capital expenditures in the form of plant and equipment replacement. On average, Campbell spends one-third of net income annually on investment in property, plant and equipment.


At $13.80, Campbell sells for a price-to-earnings ratio of 14, which makes it slightly undervalued based on its five-year average P/E of 15.5. Based on a three-year average of past earnings growth, it's selling for a very high PEG ratio of 3. Even if we add the dividend to the growth rate (11% + 3.5), the PEG ratio is over 2 and with earnings on the decline, it's hard to recommend Campbell until profits take a turn for the better.


This round of the food stock battle royale goes to Hormel. While Hormel also saw earning decline recently, revenue was up 6% and the overall fundamentals (debt, costs) are superior to Campbell.

Round One: Kellogg vs. General Mills (winner)
Round Two: Hormel (winner) vs. Campbell

Disclosure: I am long HRL.

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