Time for Cream of Bear Soup Yet?
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It’s not yet time to sit down and enjoy a red and white bowl of Cream of Bear Soup. Mmm! Mmmm! Good. Actually, the bear soup isn’t quite hot enough yet as shares rose early to a two year high after earnings and then actually dipped below the pre-ER price. Campbell’s Soup Company (NYSE: CPB) just reported Q4 earnings and profits were up 27% on soups and sauces, surprising analysts. Net income was up $30 million from Q4 a year ago. But they shouldn’t have been so surprised. I had listened to the July Analyst Day webcast and liked what new CEO Denise Morrison had to say. First, she said a mea culpa for the company’s last few years’ emphasis on sodium reduction, admitting it was ill-timed and that initiative was to go on the back burner.
What’s Cooking in the Campbell’s Kitchen
What is heating up are new products in the soup and meals division, with 41 new products as compared to 2011’s seven new products. Also the snack and baked goods division is also cooking up some tasty treats with changes to kid favorite Goldfish (which had exceptional growth); and to attract adults, specifically the milennials (age 19-34), they are making healthy adult crackers and Pepperidge Farm breads as well as improving some of the cookies. Honestly, how can you improve on a Milano?
Beverage sales improved as V8 V-Fusion and V-8 Splash were up and the V-8 Smoothie energy, sparkling and kids drinks were just launched this year. I have to admit V-8 Splash is the one Campbell’s product I can’t live without as it’s the only way to get veggies down a certain picky eater.
All of this was foretold on the Analyst Day as they explained their new emphasis on social media, engaging millenials and expanding internationally, a three prong approach they expect to grow sales and help them compete in a challenging commodity environment; they said nothing concretely different on the conference call. They also said that 2012 was an investment year, and invest they did, buying Bolthouse Farms for $1.55 billion earlier this summer for an opening into the popular packaged fresh foods arena. They expect Bolthouse to contribute $750 million in sales. I had to reread that twice. Man, that’s a lot of baby carrots.
And they still have the 3.60% yield. The P/E is only 15.31. Mmmm. Then, in 2013, they expect to roll out yet another 50 new items. Some of the more promising may be more flavors of Swanson Flavor Boost, packaged flavor sauces that offer concentrated stock and seasonings, which should appeal to millenials in their quest for more tasty meals that are easy, and the convenient Go-Soups and Gourmet Bisques.
Of note from the conference call: Gross margins declined from 39.8% to 38.5% and the company also saw currency headwinds that affected earnings. Most of the cost inflation and currency concerns were offset by increased productivity and higher selling prices.
International Simple Meals and Beverages was overall flat with good sales in Latin America tempered by lower sales in Canda, better numbers in France offset by lower numbers in Germany, and so on and so on. This, however, is one of the three prongs they plan to address in 2013.
The worst performing sector was North American Foodservice earnings, which declined 38% due to cost inflation and promotional spending. This segment only makes up less than 10% of the Campbell’s pie...or Pepperidge Farm pie if you will.
You know most of the Campbell’s products, Pace salsa, Prego spaghetti sauce, Pepperidge Farm, Swanson broths, V-8 products and of course Campbell’s soup. Direct competitors are Kraft Foods, H.J. Heinz (NYSE: HNZ) and General Mills, though none of these compete directly in all areas. Heinz just reported another good quarter, but its P/E is slightly higher at 18.92; the yield is a little bigger at 3.70%.
Now for Numbers Soup
As for the alphabet soup, or numbers soup (and why don’t they make a numbers soup?), debt was down by $145 million, and they are continuing to repurchase shares, 12.6 million at last count. Finally, for fiscal 2013 they expect to grow company sales by 10 to 12%. But earnings are expected to grow at between 4 to 6%, which is not burn your tongue hot. Campbell’s has a way to go from its 2008 sales highs but it is improving, or as they always say on the labels, “New and Improved.” Moving into the fastest growing segments of the grocery store, the fresh packaged foods, energy drinks and smoothies is a step in the right direction. The company needs to get away from the condensed soups and jettison products like the Swanson canned chicken. People want fresh these days.
What they didn’t discuss was the dividend, which some analyst should have asked about. The payout ratio is around 50% and will probably not be raised soon as it wasn’t mentioned on the call. Still, the company is working on raising numbers with increased spending on R&D and what they call ‘innovation teams’ on improving their strongest selling products and giving Campbell’s a younger, hipper image; so the coming FY2013 should be better than FY2012. I caution that Campbell’s progress may seem as slow as getting catsup out of a Heinz bottle, but it will eventually plop on your plate.
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