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Executive Summary November 1, 2006 – Over-valued, Sell
Executive Summary November 1, 2006 CPB - NYSE 37.27 EPS Forecast FYE 2006 2007 2008 200952 week range $28.88-$38.49 EPS 1.88 1.65 1.79 1.92Revenue (2005) $7,072,000,000 Valuations Market Capitalization $15.56 bill. Trailing P/E 21.03 Enterprise Value $17.45 bill. Forward P/E 19 Shares Outstanding $407 million PEG ratio (5yr) 2.79 Dividend Yield .80 (2.10%) Price/Sales 2.05 3-month Avg Daily Trading Volume 1,758,110 Price/Book 12.05 Percent Institutional Ownership 41.10% Intrinsic Valuations Book Value Per Share $4.34 Discounted Dividends $11.83 ROE 81.00% Free Cash Flows $33.71 ROA 10.40% Residual Income $31.52 5 year avg. P/E ratio 17.60 Abnormal Earnings Growth $32.22 Cost of Capital Est. R2 Beta Ke Long-Run RI Perpetuity $20.57 Ke Estimated 10-year 6.01% 5-year 1.30% 1-year 6.13% Beta 0.57 Published Beta 0.37 Kd 5.90% WACC 5.92%
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Business/Industry Analysis
Campbell’s Soup Co. a leader in the processed and packaged food industry
has been doing just that for over 125 years. Campbell’s currently has a market
capitalization of 15.56 billion. Campbell’s has been competitive in this market
since its beginnings. However, a great deal about Campbell’s has changed since
then. In 1904 Campbell’s was proud of their product line involving 21 varieties
of soups. This variety was the focus of their advertising at the time. Aggressive
advertising since their beginning has helped to establish Campbell’s as being one
of the most widely recognized brand names by the American general public.
Today Campbell’s not only offers a larger variety of different soups, it also
offers a variety of different brand names that have been acquired over the years.
In order to keep up with industry innovations and overall change over time it has
been important for Campbell’s to seek other areas of opportunity. Campbell’s
currently owns Prego, Pace, Godiva, Swanson, Pepperidge Farm, and other like
companies that all help Campbell’s to stay competitive in their industry. We can
see from the brands that Campbell’s not only offers different genres of food,
(Pace – Mexican, Prego – Italian) but also different areas of the cooking process
(Swanson – broths). Campbell’s also is committed to finding ways to produce
healthier foods in order to compete in that niche market as well.
Campbell’s is one of seventy-eight companies in the processed and
packaged foods industry. There are
four companies with more market
capitalization than Campbell’s Soup Co.
The three main competitors within the
industry are; Heinz, Kraft, and General
Mils. The current industry statistics are
as follows;
Market Capitalization: 282B Price / Earnings: 12.1 Price / Book: -58.1 Net Profit Margin (mrq): 8.8% Price To Free Cash Flow (mrq): 508.2 Return on Equity: 25.6% Total Debt / Equity: 0.9 Dividend Yield: Finance.yahoo.com
2.7%
Industry Statistics
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The processed and packaged food industry has out performed the S&P
500 over the last three months. The following chart will display how Campbell’s
has measured up against its main competitors in the industry as well as the S&P
500 over the last three months.
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In 1869, Ulysses S. Grant was sworn into the Presidency and the last
stake was driven into the transcontinental railroad. In that very same year, two
men both with great entrepreneurial spirits, came together to form a business
that would grow to become one of the most recognized companies in the world:
Campbell Soup Company. The business began producing canned tomatoes,
vegetables, jellies, soups, condiments and minced meats. In the 1930’s,
Campbell entered into radio sponsorships, using their now world
renowned jingle, “M’m! M’m! Good!” to captivate listeners. Even
today with television adds Campbell’s Soup makes its way into
our homes with young kids dancing to rap songs on the screen.
In 1898 a company executive attended a very big rivalry game
between Cornell University and the University of Pennsylvania. The executive
was so excited about Cornell’s new red uniforms he convinced the company to
adapt the white and red colors as their new official colors of the
cans we still see today.
Campbell has always put a great deal of emphasis on
advertising and appealing to the blue-collared hard working
Americans, sponsoring programming like Lassie, Peter Pan and
the Campbell Playhouse radio series. They created more jingles
for Americans to remember such as, “Wow! I could’ve had a V8!” and “Uh-oh
SpaghettiOs”. Campbell has reached out all over the world providing their
products to customers in nearly every country in the world! Campbell’s Soup has
even regional varieties like Duck-Gizzard Soup in China and Cream of Chili
Pablano soup in Mexico. Continually striving to make Campbell’s Soup brand the
quick, easy and inexpensive way to get great soup, the brand
has introduced new and interesting ways of keeping up with
the times. In 2004, Campbell’s Soup Company celebrated its
50 year anniversary of listing on the New York Stock
Exchange.
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The Five Forces Model
Rivalry Among Existing Firms:
The consumer packaged goods industry is a highly competitive market
since there are so many different players. Campbell’s owns about 70% of the
soup market in the U.S. but has many competitors, such as Kraft, General Mills,
and Heinz. In today’s markets, brand loyalty is suffering, and retailers are trying
to come up with the next big thing. The trend has been becoming more
competitive between categories instead of competition between brands.
To remain competitive in the consumer packaged goods industry,
companies must look at and evaluate their supply chain to eliminate inefficient
methods and maximize value. They also must compete in price wars to try and
take away some of the market share from their competitors. Since there is a
growing dominance of large retailers who are selling these products to
consumers, they are equalizing the balance of power between consumer
packaged goods companies and retailers, giving the customer greater power.
To compete in this market, a firm would have to have a substantial
amount of startup capital, and a well defined marketing strategy. Firms that
have been continuously successful in the consumer packaged goods industry
have had to come up with bigger and better ideas than their competitors to keep
up with ever changing consumer demands.
Net Sales 2004
Cambel l 's13%
Heinz14%
Kr af t53%
Gener al Mi l ls20%
Net Sales 2005
Cambel l 's12%
Heinz14%
Kr af t55%
Gener al Mi l ls19%
Net Sales 2006
Cambel l 's12%
Heinz14%
Kr af t55%
Gener al Mi l ls19%
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Threat of New Entrants
Campbell’s and its competitors enjoy advantages in the consumer
packaged goods market. New firms wanting to enter this market will face large
economies of scale, which will require a large amount of startup capital. New
firms would be lagging behind without an established brand name or consumer
brand loyalty. Another barrier to entry would be the fact that it is difficult to take
the shelf space of established brands. Wal-Mart is their largest buyer and it
would be difficult for a small start up company to get the distribution chain that
Campbell’s has. Getting into this industry as a start up company would be nearly
impossible as these companies have a long history and a well established market
position.
Threat of Substitute Products In the processed and packaged foods industry the threat of substitute
products is obviously a relevant threat to any of the industry players. The main
difference in products in this industry is simply by name and/or price, which
leads to consumers’ indifference between products at some point in their buying
process. In the modern processed and packaged foods industry it seems as
though brand loyalty is suffering, which is leading to increase in substitute
products. This is driving margins down, as there is an increase in marketing costs
that arise from firms trying to differentiate their products. Also, companies are
spending a great deal of money trying to come up with the next “hot” product
that would give them a competitive advantage.
A relatively new trend in this industry comes with a more health conscious
consumer bases. General Mills seems to be leading the change with their Betty
Crocker line which makes the Progresso Soup. Progresso Soup has recently
implemented an aggressive marketing strategy which targets health conscious
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consumers. Given the room for expansion in the processed and packaged foods
industry, the switch to health food seems to be an area prime for new substitute
products.
Even thought the threat of substitute products exists at a high level in the
processed and packaged foods industry there is most definitely room for firms to
be successful. The main way to maintaining marketshare is through extensive
marketing campaigns and new product development. It seems that if a firm is
successful at one of these two measures they should have a competitive
advantage and limit their risk to substitute products for a short period allowing
them to have good profits until the industry adjusts.
Bargaining Power of Buyers
In the processed and packaged foods industry, generally the firms do not
directly set prices to the consumer. Wal-Mart is the largest buyer of the industry
goods and they set prices based on the contracts they enter into with the
individual firms. Generally, the contracts will have clauses to/for both parties
limiting the sell price to the public and other retailers. Wal-Mart can be used as
another example here. Their contracts commonly state if a firm sells their
product to another retailer at a lower price than they have agreed upon with
Wal-Mart, Wal-Mart has the right to pull the product from their shelves. This
being the case, the industry as a whole has limited bargaining position with the
mass retailers.
Given the way the products are sold to consumers in the processed and
packaged foods industry it is in each firm’s interest to enter into contracts that
allow for attractive prices to consumers. If the prices are set too high, consumers
will obviously find substitute products which will eventually lead to retailers
paying less or not choosing to renew contracts with firms.
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Bargaining Power of Suppliers
In this industry there are two main types of supplies needed by the
companies. First they purchase the necessary ingredients for the foods they are
processing such as; vegetables, grains, sugars, etc. The companies also need to
be supplied with the materials necessary for packaging the foods they process.
Examples of these materials would be card boards and types of metals.
This is an industry where the companies such as Campbell’s, or their
designated buyers, have more bargaining power than the companies supplying
their needs. The reason behind this is that for the most part, all the necessary
supplies are commodities and there are a large number of suppliers to choose
from. This gives the companies in this industry the opportunity to buy at the
price and quantity of their choice based on the fact that the suppliers are
competing for their business.
Value Chain Analysis
When looking at the key factors of the industry we can see a few
important points. First, we see that competition among existing firms is high.
However, there is relatively no threat of new entrants. We also find that there is
a relative threat when it comes to substitutes. Another important fact to look at
is that the buyers do have power of the companies in this industry. The
reasoning for this as explained above is that this industry is not selling directly to
the consumer but to other companies such as Wal-Mart. It is important to note
that the suppliers for this industry have a relatively small amount of bargaining
power.
When we look at these five forces we see that three of the five indicate
high competition in the industry. So, when developing a strategy to compete
with the other companies in this industry it is important to look at what existing
firms are doing, how one can keep up with substitutes in the market, and how
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one can develop the best relationships with those purchasing mass quantities of
a product.
First, we look at the competition among the firms in this industry. The
main companies are Kraft, Campbell’s, General Mills, and Heinz. All of these
companies have diversified themselves to process and package many different
types of food. While these are areas one company may be known for, they are
likely competing in the other areas of this industry. To be competitive in this
area of the industry it is important to be able to compete on price and have a
wide range of products.
The second area of competition within this industry is the threat of
substitutes. For this industry, substitutes can be identified as healthy versus
non- healthy and gourmet versus regular etc. So, in order to succeed in this
area it is important that a company has diversified product lines. People will
always buy food, but to be successful, a company in this industry will need to be
able to produce the kinds of foods that people are currently looking to buy.
The last important area to look at in order to create value for a company
in this industry is the bargaining power that the buyers have. The largest buyer
for this industry as mentioned before is Wal-Mart. Wal-Mart is well known for
purchasing the quantities of a product they want for the price they want. To
succeed in this industry it is important to set up a management team that can
get the prices set with buyers such as Wal-Mart that can best benefit your
company. It is also important to look at all of the super markets and make sure
your products are well positioned on there shelves as well.
Competitive Advantage Analysis
Having the processed and packaged foods industry broken down, we can
now focus on what strategies Campbell’s soup company has implemented to stay
competitive in this industry.
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Campbell’s recognizes that cost leadership gives them the advantage of
achieving superior performance compared to their competitors. This is an
element of cost leadership that Campbell’s Soup Company uses in economies of
scale. Through research of Campbell’s 10-K’s we see that they have invested
heavily is warehouses, machinery and other physical assets for their business.
We also see they have invested heavily in advertising and R&D. Making a
commitment to all these areas of their business is giving Campbell’s a
competitive advantage.
While Campbell’s does use elements of cost leadership to create a
competitive advantage, their main focus is on differentiation. Elements of
differentiation Campbell’s uses to create a competitive advantage are the variety
of their supply, their brand name, the quality of their goods, and the quality of
their services. When considering the variety of their supply, we see that
Campbell’s offers over ten different brand names in 120 different countries. Each
brand sells a variety of individual products. In 2004 Campbell’s decided to
expand its well known brands in the simple meal baked snack categories.
Campbell’s has the ability to compete with other industry leaders in many areas.
Some of the other brand names Campbell’s owns are Prego, Pace, Pepperidge
Farms, and many others; thus making them very diversified within their industry
and able to compete in all areas of food production.
As far as Campbell’s desire to use their brand name for a competitive
advantage we first look at their history. Campbell’s Soup Company is over 125
years old and for 100 years Campbell’s executed ads and marketing campaigns
to present an all-American image. Campbell’s works hard for many charitable
causes including children’s hunger concerns and diversity in the work place.
Campbell’s also owns over 6,900 different trademark registrations and
understands their importance to the success of the company. Campbell’s has a
long history of quality foods and selfless acts that make them a very recognized
brand name.
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When looking into the quality of Campbell’s goods we first see that they
have been dedicated to this element of differentiation for 125 years. Second, we
look at their dedication to only using the finest ingredients and that they have
been and still are very selective in the process of finding suppliers. When it
comes the quality of their service we also find information on the website and
mission statements indicating desire to perform their service in the most efficient
and productive way. Campbell’s believes in taking the time to make sure all their
employees know the history of the company that they are working for.