Great companies share one key trait: They can sustain market leadership and growth for decades and even generations.
Still, on rare occasion, a dependable blue chip will start to lose its way. Over time, factors like increased competition, changing product landscapes or simply a failure to adapt with the changing times can gradually -- almost imperceptibly -- erode a once-dominant market leader into an outmoded underperformer.
Today, perhaps the most poignant example of this is the iconic food products manufacturer Campbell Soup Co. (NYSE: CPB).
While Campbell is still formidable, the core products that drove its success for generations are now a hindrance. Simply put, consumers have been shifting to fresh and organic foods, leaving fewer dollars for the company's less healthful pre-packaged soups, vegetable-based beverages and sauces that account for the bulk of Campbell's revenue.
Because of this trend, the firm has been stunted for many years. At $8.3 billion, the top line increased a mere 9% in the past decade. Current earnings per share (EPS) of $2.41 represent a 4% compound growth rate during that time. In fact, profits have been stuck in neutral since 2010.
Campbell's stock, unsurprisingly, has lagged the broader market.
Results are lackluster across most of Campbell's five segments, proof that just one struggling division isn't to blame for current difficulties. In the largest segment, U.S. Simple Meals, sales growth slowed to 3% in fiscal 2014 from 5% the prior year. The $2.9 billion segment, which includes canned soup, pasta sauce, canned beans, gravy and broth, accounts for the bulk of the company's revenue.
Sales of Campbell's brand condensed and ready-to-serve soups have outright declined in the most recent fiscal year.
Campbell's brands are also struggling abroad, falling by double-digits in key Latin American and Asian markets. Campbell's beverage division, led by the "V8" brand of fruit and vegetable juices, is also in retreat.
A rare bright spot: Global Baking and Snacking, which sells cookies, crackers and other packaged baked goods under the well-known Pepperidge Farm brand. There, sales are up 11% since fiscal (July) 2012 to $2.4 billion.
The recent introduction of organic soups for adults and children by the U.S. Simple Meals division could meet with a similar fate. As an extremely late entrant into organic foods, Campbell faces a steep and costly uphill battle to establish itself in this market. Success isn't a foregone conclusion.
Meanwhile, the firm is saddled with $4 billion in debt, nearly half of which is due within 12 months. Trouble is, its cash stake has eroded by about a quarter billion dollars since 2011 to $232 million. At $757 million, free cash flow isn't enough to cover short-term obligations, either.
It could easily be the start of a vicious cycle where Campbell has to borrow more to handle its debt. In the absence of strong sales and profits, this could begin to divert progressively larger amounts of cash away from the traditionally solid, reliable dividend (currently $1.25 a share, with a 2.7% yield).
But it doesn't look like growth will be coming to the rescue anytime soon. Q2 sales slipped 2% from year-earlier levels to $2.2 billion.
Adding insult, rising input prices, greater promotional outlays and higher supply chain costs contributed to a 14.6% year-over-year drop in companywide operating earnings.
Campbell hasn't raised its dividend since 2013, and the next move on the dividend may be a reduction. That, in turn, may set the stage for a steady drop in share price.
Risks To Consider: Campbell often tries to stimulate sales through promotions, which may have some short-term benefit but can ultimately compromise long-term growth and profits.
Action To Take --> Campbell Soup, once one of the safest and most desirable blue-chip stocks, has hit a wall. With core offerings that are gradually losing appeal and a lack of proven alternatives, the firm has little growth potential; nearly identical forward and trailing earnings multiples (both around 19) reflect paltry expectations for the next 12 months. A costly, multi-year product line and image overhaul may be the best way for management to stave off obsolescence.
Moreover, the main argument for investing in Campbell -- dividends -- has become much less compelling. Shareholders should consider finding a suitable replacement before the broader market realizes Campbell doesn't warrant such a high valuation. If this occurs, the share price could plunge. For conservative investors, avoid this stock. For aggressive investors, a short position could be in order.
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