Too many investors believe they need to find cheap, under-$5 stocks with fancy names and promising new products if they want to hit a home run with their investment dollars. This couldn't be further from the truth. A majority of inexpensive stocks remain cheap because their "promises" don't come to fruition, while more predictable leading stocks like Coca-Cola and Johnson & Johnson continue to be solid investments. Why? Because these companies dominate their industries, yet remain entrepreneurial.
The company: Based in Camden, New Jersey, Campbell Soup Co. is the leading soup seller in the United States. It also sells Prego and Pace sauces; Pepperidge Farm biscuits, cookies and crackers; and Godiva Chocolates.
The markets: Seventy-five percent of sales and 90 percent of operating earnings are generated domestically, but Campbell's overseas market is growing rapidly, and its sales should become more geographically diversified in the coming years. The company sells through traditional grocery chains and supermarkets, but its newest venues are also its fastest growing: convenience stores, drugstores and large discount chains, such as Target and Wal-Mart. Internationally, Campbell sells in Asia, Australia, Canada, Mexico and Western Europe, among other locales.
The sizzle: Campbell has been spinning off or selling its underperforming divisions and cutting costs dramatically, while at the same time aggressively marketing its best-selling products through new distribution channels. By focusing on its "Best in Show" products, Campbell is increasing profit margins and sales growth while cutting costs. On the international front, Campbell acquired the leading soup sellers in France and Germany in 1997 and 1996, respectively.
The risks: Campbell's stock has earned a premium price on Wall Street due to the company's leading brand name and market position, and its long-term objectives. If Campbell's new business initiatives are unsuccessful, the stock may be temporarily taken down a few notches.
Historical financial performance: Campbell's revenues have steadily grown over the past 10 years from $3.8 billion in 1988 to $6.6 billion in 1997, with an increase achieved every year but one. More important, operating margins have climbed from 17 percent in 1995 to nearly 20 percent in 1997, and could top 21 percent in 1998--a level few companies accomplish.
Projected financial performance: Campbell's expected earnings-per-share growth at Campbell over the next five years is 14 percent annually. If cost-cutting and new business initiatives go well, earnings growth could climb closer to 16 percent per year. A restructuring plan in 1996 that included a $2.5 billion stock buy-back program will add to earnings-per-share growth potential as well. The company aims to buy back at least 2 percent of its outstanding shares annually.
With the long bond yielding under 6 percent and the stock market returning 11 percent annually, Campbell Soup, yielding 1.60 percent, is well worth a look.