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Bull Case For Campbell Soup: Heinz-Like LBO Not Needed, Business Recovering

Suzanne McGee

Many of the pundits watching last week’s flurry of deal making wondered how long it would be until the private equity investors who, in tandem with Warren Buffett’s Berkshire Hathaway (BRK-B), agreed to pay $28 billion to acquire H.J. Heinz (HNZ), discover an insatiable appetite for chicken noodle soup. Or, more specifically, for Campbell Soup’s (CPB) iconic list of food products, led by the red-and-white cans immortalized on canvas by Andy Warhol. Little wonder, then, that while the S&P 500 barely budged last week, Campbell Soup’s stock rocketed 3.4% higher, bringing its gains for the last year to nearly 20%, as seen in a stock chart.

CPB Chart

There’s some logic to it – after all, as some of those pundits pointed out after the Heinz news hit, 3G Capital, the buyout firm involved in that deal is the one behind the Great Beer Brand Rollup that created today’s behemoth, Anheuser-Busch InBev (BUD).

But Campbell Soup has a lot more going for it than takeover speculation. While its profits for the just-reported fiscal second quarter (ended January 27) fell 7.3%, that was due to restructuring and acquisition costs; excluding those, profits edged higher while revenue climbed 10%. The company is in the midst of an ongoing attempt to boost profit margins, by cutting costs and looking for strategic moves, from new products to acquisitions.

CPB Cash from Operations Annual Chart

Still, being boring is hardly a bad thing – especially when your roster includes such strong brands and your stock is trading at a discount to many of your peers, based on PE ratio.

CPB Forward PE Chart

While waiting for a buyout offer or some additional evidence of a turnaround, investors in Campbell Soup can take comfort not only in its tomato or chicken noodle soups but also its dividend yield, which still stands at 2.94%, with a payout ratio of about 60%, and that dividend has grown 31% over the last five years. Critics have pointed out that the company is overdue for another dividend increase – and that may well be on the cards, given that while the cash on its books has fallen from its highs in mid-2011, it still stands at $361 million.

Soup may only rarely be an exciting investment, but while the Heinz deal has added a bit of drama to the background, the fundamentals remain appetizing enough to consider it as a stable staple holding offering an appealing yield.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.

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