Recently released earnings from Campbell Soup Company (NYSE: CPB) are a mixed bag. Sales of the company's signature product, soup in whatever form, are down. Sales are not down by a lot, but down nevertheless. Overall, total sales increased 7% to $2.3 billion, but almost half of that increase was due to currency exchange, not organic growth. EPS increased 6% to $0.70, but some of that gain was due to a $78 million stock repurchase that reduced the number of shares outstanding by 2 million. In many divisions, costs rose more quickly than prices, thereby depressing gross margins. Overall, cost of sales increased as well. Higher advertising and promotional expenses, coupled with a $104 million increase in net debt, caused a decrease in cash flow from operations. CEO Douglas Conant is optimistic that the current winter quarter, always a good season for soup sales, will deliver better numbers.

Soup sale declines were counteracted by increases in sales of Swanson broth, various types of V-8 juices and Prego pasta sauces. US baking and snacking sales increased 10% to $532 million, half the soup division revenue. Increased snack sales were led by the humble Goldfish cracker and other Pepperidge Farms baked goods.

Worldwide sales of Godiva Chocolate increased at least 10%. So why is Campbell looking to offload the brand? Campbell soups are now beginning to be available in Russia and China. The company hopes to see incremental additions to the bottom line from those two markets shortly. The company is sticking with its FY 2008 guidance of 3-4% sales growth rate and 5-7% EPS growth rate, acceptable numbers as long as the major driver of growth is organic and not currency exchange.

The first paragraph of Campbell Soup Company (NYSE: CPB)'s 4th Quarter 2007 earnings report is a textbook lesson in corporate double speak. The press release headlines trumpet that fiscal year earnings per share (EPS) was up 13%, and sales up 7%. Good news, right? Not exactly. It's good news when sales are up AND earnings are also up, which is not the case with Campbell Soup. Investors do not care primarily what drives sales. Investors care what drives earnings, also known as profits, what we get to keep. So while 4th quarter sales were up 10% for the quarter to $53 million, despite the fact that some types of soup sales were flat, earnings were down 30% to $0.14 per share. That is the number that matters.

The big news for Campbell Soup is that, having spent quite a sum of money in preparation, the company is now ready to launch soup sales in both Russia and China, the world's two largest soup markets. Presently, the company has not released tentative figures of what it hopes sales and revenues will be in these two new markets. For fiscal year 2007, Campbell Soup did $1.4 billion in international sales, not counting Russia and China.

Like many food manufacturers, Campbell Soup is faced with rising costs for raw materials. The company has instituted cost cutting programs on the one hand, while increasing quarterly marketing expenses by 15% on the other. For the fiscal year, cash flow was reduced by almost 50% (not a typo) while the company repurchased 30 million shares at a cost of $1.14 billion. There are some good pieces of news in the earnings report. Sales of V-8 Juice, Prego pasta sauces, and Pace Mexican sauces all increased, as did sales of ready-to-serve soups. The company attributes some of the soup sale increase to the gravity-fed shelving systems in place in many grocery stores. This negates the need for customers to have to root around at the back of shelves for cans of the desired variety. Sales of Pepperidge Farms baked products increased but so did the marketing expenses associated with that sales increase. Goldfish crackers continued to be a big seller, offset by declines in cookie sales. (I know I did my part with cookie sales.)

Campbell Soup forecasts fiscal year 2008 sales growth of 3-4% over 2007 net sales of $7.867 billion, and diluted EPS growth of 5-7%. The stock closed on 6 September at $36.68, down $1.32 on news of earnings decline.

[photo mccheek]

Among the most widely recognized product taglines in the English speaking world are "M'm! M'm! Good!," "Wow! I could've had a V8!," "Uh-oh SpaghettiOs" and "Pepperidge Farm Remembers." Guess what? They all belong to the same Camden, New Jersey firm.

Campbell Soup Company (NYSE:CPB) is a global manufacturer and marketer of soups, baked snacks, vegetable-based beverages and chocolate products. Founded in 1869, the company has a portfolio of market-leading brands, including Campbell's, Pepperidge Farm, Arnott's, V8 and Godiva. The firm is the biggest soup maker in the world. It controls nearly 70% of the U.S. market.

Campbell pleased investors last month when it announced fiscal second quarter EPS that topped analyst estimates and revenues that essentially matched the consensus view. Management also offered solid upside guidance for FY07 earnings. The CEO attributed success to solid gains in condensed, ready-to-serve and broth soups and remarked that he was encouraged by the early performance of the firm's lower-sodium offerings. CPB shares popped on the news and have since been consolidating the gain in a bullish "flag" pattern. Stocks frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers recommend the shares with two "strong buys," three "buys" and fifteen "holds." The CPB P/E ratio (20.80), EPS Growth rate (24.55%), Return on Assets (11.00%), Return on Investment (16.61%) and Return on Equity (50.91%) compare favorably with industry, sector and S&P 500 averages.

Institutions hold about 45% of the outstanding shares. The stock is one of those used to calculate the S&P 100 and S&P 500 Indexes. Over the past 12 months, it has traded between $30.75 and $42.65. A stop-loss of $35.00 looks good here.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.