FIN 4220

CASE Paper
Campbell Soup Company (CPB)

Company Overview

According to the 10k, Campbell Soup Company is a manufacturer and

marketer of branded convenience food products (Campbell). CPB was
organized and incorporated in New Jersey in 1922. The company divides and
reports operations into five segments: U.S. Simple Meals, Global Baking and
Snacking, International Simple Meals and Beverages, U.S. Beverages, and
North America Foodservice. CPB became a recognized brand in the U.S.
during the early 20th century. In the 1930s, CPB expanded into the United
Kingdom and Canada. Marketing and advertising has been an important part
of the business strategy of CPB from the beginning, with many of their
products being incorporated into American pop art. CPB has grown into a
multinational company that has averaged $7.7 billion in net sales during the
fiscal years 2010-2012 and employing approximately 17,700 people as of
2012.
Some of the ingredients and packaging required to manufacture CPB
products can fluctuate in price. To help deal with price changes, CPB uses
purchase orders as well as short- and long-term contracts to hedge against
price volatility. Some ingredients required are only available seasonally. This
means that inventories are at a yearly high during the fall and decline
throughout winter and spring. When selling products, CPB sells to retail
stores, mass merchandisers, and convenience stores who then resell
products to the consumers. The five largest customers of CPB accounted for
34% of the consolidated net sales in fiscal years 2010-2012, with the single
largest customer, Wal-Mart Stores, accounting for 17% of sales during this

time. Along with the seasonal availability of some ingredients, demand for
some products can be seasonal. Fall and winter months account for the
highest sales due to the demand for soup products, however CPB sauce and
snack products sell steadily throughout the year.
CPB experiences a high degree of competition across all markets.
There are large, multi-national food product companies like General Mills and
Heinz that compete with CPB for U.S. market share as well as for
international consumers. In addition to these large competitors, CPB must
deal with smaller specialty companies in the U.S. that manufacture one or
two high-end products and local food product companies in their
international markets.
SWOT Analysis
Strengths:
CPB is a large, multinational company that is among the global leaders
in the food products market. They have expanded outside the U.S. with
manufacturing facilities in Australia, Belgium, China, Canada, France,
Germany, Indonesia, Malaysia, Mexico, and Sweden. Having a presence in so
many global markets not only helps build the CPB brand, but improves the
companys revenue diversity. There are less dependent on one specific
market to determine performance. CPB has a desire to diversify their
product lines. In 2012, they acquired Bolthouse Farms, a food and beverage
company that develops and manufactures fresh, healthy products. CPB is
trying to expand into the baked snack and healthy drinks market. Finally,

CPB is in a relatively stable industry. They reported very similar revenues in

their previous 5 fiscal years of operation.
Weaknesses:
Like many multinational companies, CPB is susceptible to things like a
weakened economy, highly competitive industry, and foreign currency
fluctuations. Additionally, Wal-Mart represents a large (17%) portion of CPBs
overall revenues. Like many companies that provide products to Wal-Mart,
this hurts their ability to effectively negotiate prices for their products. The
majority of CPBs revenues are heavily concentrated in the United States
(about 70%). The struggling U.S. Economy could have a negative impact on
current year sales for CPB as well as future revenue growth.
Opportunities:
CPB has begun to expand into international markets and should see
continued opportunities on these fronts. Their international presence allows
CPB to take advantage of new emerging markets as parts of the third-world
become more commercialized. Their acquisitions have allowed them to
expand into the healthy snack food and beverage markets; however, they
could expand into other food markets with products like organic soups.
With recent economic troubles in the U.S. and Europe, many consumers are
cutting back on discretionary spending like dining-out. This opens up the
opportunity for more CPB products to be sold as consumers are making the
choice to stay home more frequently.
Threats:

As a food and beverage manufacturer, CPB is susceptible to volatile

price fluctuations in ingredients and materials that could be caused by
natural forces beyond their control, like droughts, hurricanes, etc. CPB
produces name-brand food and beverage products, and with a slowed
economy, consumers may downgrade to generic brand products in an effort
to save money. CPBs largest competitors are General Mills and Heinz. Both
companies have a larger market cap than CPB, more employees, and have
higher yearly revenues.
Financial Analysis
Shares of CPB are currently trading around $45 on the NYSE. In order
to determine whether this value was accurate, I performed analysis of CPB
using the discounted cash flows, residual earnings, and abnormal growth
models. I used the forward P/E ratio of 16.84 found on Yahoo Finance to set
my required rate of return at 5.94% (1/16.84). I calculated the average
growth rate of the EPS over the past 10 years on a per-year basis and used
that as my short-term growth figure (assumed 5-year short-term period).
The growth rate was 6.62%. I also calculated the dividend payout ratio for
each of the past 10 years and used the average rate (42.1%) to calculate
dividends in the RE and AEG valuations. For a long-term growth rate, I used
the most recent value of growth rate for the United States GDP calculated by
the
World Bank: 1.7%.

The discounted cash flow valuation returned an enterprise value of

$23,810, over four times the amount calculated from the CPB financial
statements. Once reduced by net debt, this left a value for equity of $18,178
and a per share value of $57.35 (using CPBs basic weighted average shares
outstanding of 317). CPB has maintained consistently high cash flow from
operating activities net of investing activities over the past three years;
however this valuation does not reflect their financing cash flows. Used
independently, it is of limited usefulness when trying to determine if CPB is
over-valued or under-valued since earnings are a more significant figure than
FCF. However, it does show that operating cash flows are strong at CPB.
The residual earnings valuation model showed positive RE growth at
CPB. In fiscal year 2012, CPB has a relatively large amount of debt when
compared to equity: the debt-to-equity ratio is 6.27 (5632/898).
Additionally, a large portion of CPBs stock is held in treasury. This large
amount of debt outstanding and low number of shares has kept the book
value per share down for CPB and greatly levers the EPS, DPS, and BPS
figures for the company. The ROCE figures from the RE valuation varied
widely, ranging from 91% to 35%. This model valued shares of CPB at
$63.87, more than the market price of $45 and much more than the book
value per share of $2.83. The large ROCE in the beginning years is
generated by the leverage of low book value and high debt, and as the book
value increased over the 5-year projection, the ROCE declined accordingly.

The abnormal earnings growth valuation model returned a value per

share figure of $80.98, the largest of the three valuation models. Both the
value generated from P/B in the RE model and the P/E value are higher than
the stock price. All of these values are dependent upon the required rate of
return, which is based on the forward P/E and next years earnings. If the P/E
values change, valuation of CPB must be updated to reflect a new required
return. As they stand, all three valuation models reveal that CPB should be
trading higher than current market price. The average of the three values is
$67.40, almost 50% higher than the current market value. If these models
are to be believed, there is much room for growth in CPB.
Financial Statement Analysis
The statement of common stockholders equity reveals that CPB is
undergoing a trend of repurchasing outstanding shares. During fiscal year
2012, CPB had earnings of $764 million yet equity decrease by over $100
million. This decreased was evenly caused by similar amounts of declared
dividends and stock repurchased ($375 million in dividends, $412 million in
stock repurchase). CPB had a total payout ratio of 0.45 for the year. By
repurchasing so much available stock along with declaring dividends, CPB
seem to indicate they wish to keep the stockholders equity low and financial
leverage high for the near future.
CPB differs from the norm on some important balance sheet and
income statement financial ratios. The industry averages of a few ratios for
food product manufacturers are: ROCE 13.7%, FLEV 0.414, RNOA 12.1%,

and PM 4.4%. From the reformatted balance sheet and income statement
of CPB, it is clear that their large net financial obligations have had an impact
on these ratios. CPB has an 11% profit margin, a return on common equity
of 86%, and a return on operating assets of 23%. The RNOA at CPB is much
lower than the ROCE, which can be explained by CPBs high degree of
financial leverage: 2.52 times. Their degree of FLEV is more than six times
the industry average.
The statement of cash flows for CPB shows a large amount of positive
cash flow from operations, as well as almost three times the amount of
negative cash flow used for financing activities as investing activities.
Currently, CPB is spending the majority of its earnings on dividends, stock
repurchases, and debt financing. As long as this trend continues, I would
expect their leveraged returns to remain consistent and above the industry
average. However, it could potentially lead to stagnant growth if more
money is not invested in growing the business.
Conclusion
All the valuations based on the 6% rate of return indicated by CPBs
forward P/E showed the stock was undervalued. Additionally, the cash flows
from operations were strong at CPB. The amount of FCF spent on financing
is reducing the potential to report higher comprehensive income, but since
much of this cash is being spent to repurchase shares of stock or distributed
as cash dividends, it seems that CPB is trying to keep their financials this
way. It seems apparent that Campbells feels their stock is undervalued at

the moment as they spend large amounts of resources on its repurchase.

Based on the valuations and the strong operations at CPB, which still
outperformed industry averages without taking FLEV into account, I would
recommend a buy action for CPB stock.

Works Cited
Yahoo. (n.d.). Cpb: Summary for campbell soup company. Retrieved from
http://finance.yahoo.com/q?s=CPB
Campbell Soup Company. (2012). 10-K Annual Report 20102. Retrieved from
SEC EDGAR website http://www.sec.gov/edgar.shtml
The World Bank. (n.d.). Gdp growth (annual %). Retrieved from
http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG
Campbell Soup Company. (n.d.). Campbell's our company. Retrieved from
http://www.campbellsoupcompany.com/