ModernGraham Valuation: Campbell Soup Co. (CPB)

Company Profile (obtained from Google Finance): Campbell Soup Company (Campbell) together with its subsidiaries, is a manufacturer and marketer of branded convenience food products. The Company operates in five segments: U.S. Simple Meals; Global Baking and Snacking; International Simple Meals and Beverages; U.S. Beverages; and North America Foodservice. In June 2012, the Company purchased 1300 Admiral Wilson Boulevard in Camden. On August 6, 2012, the Company completed the acquisition of BF Bolthouse Holdco LLC (Bolthouse Farms). In September 2012, Vilmorin & Cie SA acquired the tomato and pepper breeding and sales business of the Company. In June 2013, Campbell Soup Co completed the acquisition of Plum Organics. In August 2013, Campbell Soup Company completed the acquisition of Kelsen Group A/S. In October 2013, it completed the sale of its European simple meals business to CVC Capital Partners.

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:

Balance Sheet – 9/30/2013 

Earnings Per Share

Earnings Per Share – ModernGraham 

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?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

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Disclaimer:  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.

Photo Credit:  Andrew Magill