Campbell’s Financial Recipes, and Hasbro After Santa

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Campbell Soup (CPB)

Jim: One of our readers, a teenager who’s new to investing, bought this stock and then asked us to review it, Mike. It was probably a prudent strategy--rather than seeking our input first.

Mike: Well, the reader picked a good one. In my mind, any company that’s responsible for those Pepperidge Farm Milano cookies has something going for it.

Jim: Right. Campbell not only sells the venerable soups for which it’s famous worldwide, it also makes Pepperidge Farm cookies, V8 juices, Prego pasta sauces and those pricey Godiva chocolates.

ike: But Campbell is still pretty much focused on its core product, which has a rather unappetizing name in the parlance of the industry: wet soup.

Jim: To distinguish it from that other powerhouse industry, dry soup?

Mike: Right. Go figure: This is a term that makes me think of the fluid you find in public hot tubs. But more to the point, it’s still a big money-maker for Campbell after having been a flat business for many years.

Jim: Flat wet soup. Now there’s an image.

Mike: Campbell is doing exactly what’s needed so that it avoids ending up like Kellogg, which we discussed recently.

Jim: Which is?

Mike: Which is focusing on the marketing of its main product. Growing its soup business. Widening its profit margins.

Jim: That’s true. Campbell and all of the other big food companies--H.J. Heinz, Nestle, Hershey, you name it--are struggling with the slow-growth, mature business of selling food. Plus, all of the supermarket mergers are making it harder for these companies to get shelf space with the surviving mega-grocers.

Mike: Which means their brands have to be No. 1 or 2 in their markets.

Jim: Exactly. So Campbell, like every other food company, is restructuring to put all of its energies behind those brands. In Campbell’s case, earlier this year it spun off several lower-margin lines, such as Vlasic pickles and Swanson frozen foods, into a new company called Vlasic Foods International, which now trades under the ticker symbol VL on the Big Board.

Mike: That move, in turn, gave Campbell more cash to promote its soups and other remaining lines, and it’s working. Campbell’s U.S. soup volume this year is up 4%, which is pretty striking.

Jim: I’m getting the clear impression you like this stock.

Mike: I do. Campbell’s got that business back in a modest-but-steady growth pattern, and it’s got an unbelievable 75% of the market. So it’s well positioned to exploit the situation.

Jim: Sorry, I think you’re wet on this one. This stock is a safe investment . . .

Mike: What’s wrong with that?

Jim: . . . but not one I’d recommend. What’s wrong is that, in this case, “safe” means it’s not going broke but that it also has lousy growth prospects. Putting your cash under a mattress is safe, but I wouldn’t suggest it. Look, Campbell deserves plaudits for growing such a mature business at all, but it won’t be enough to spark big gains in earnings, or in the stock price.

Mike: Wrong. Campbell’s net income is increasing with its sales growth, and investors are going to reward that.

Jim: Campbell is certainly affordable. It sells in the mid-50s, or about 26 times its expected per-share earnings for its fiscal year ending next July 31. That’s cheaper than the market’s average.

Mike: And not every stock has to be a home run, you know. Campbell is a steady, well-managed company that’s making solid gains in a business is dominates, and it’s a good, responsible stock.

Jim: Responsible! What does that mean?

Mike: Uh . . . that it’s mmm mmm good.

Hasbro (HAS)

Jim: Up next is the nation’s No. 2 toy maker, which trades on the American Stock Exchange.

Mike: As long as we’re on the subject of toys, it behooves me to admit that I misspoke a little bit last week during our discussion of Viacom.

Jim: I think I’m going to like this.

Mike: If you remember, I suggested rather unwisely that my house was being inundated with toys and other paraphernalia from the new “Rugrats” movie.

Jim: I remember.

Mike: Well, my family took great exception to this. I am reminded that we really have only two “Rugrats” items in the house, and that both are things that I brought in. So it’s my own fault if I get the sense that I’m being run out of my house by “Rugrats” stuff.

Jim: Now you can face your family again.

Mike: So, let’s turn back to a leading manufacturer of those items--Hasbro, which fights for toy supremacy with Mattel. Hasbro sells G.I. Joe, and Mattel has Barbie, of course, so everything is pretty evenly distributed.

Jim: What better time of year to go over Hasbro? The company makes Playskool toys, Milton Bradley and Parker Bros. board games, and those SuperSoaker squirt guns. Hasbro also owns Kenner and Tonka. And this year, it’s got two of the hottest Christmas toys going: the Furby electronic stuffed animal, and toys based on the popular video game and TV cartoon Pokeman--which, for the uninformed out there, is pronounced POKE-eh-MAHN.

Mike: Interestingly, it was only a couple of months ago that everyone was skeptical that this would be much of a Christmas for toy makers, one reason being that nobody could identify a hot new toy for 1998.

Jim: And it’s been said that for a toy maker to show an exceptional Christmas, it usually needs a hot toy or two, rather than a spike in consumer-spending habits or other general trends like that.

Mike: That’s right. Then “The Today Show” and those other marketing instruments that operate under the guise of news programs chimed in and declared Furby the hot toy of 1998, which is why you can’t find it anywhere and people now are willing to pay $150 for Furby on the black market.

Jim: Until next month, when Furby will be discounted 50%.

Mike: Exactly. But I think the real story with Hasbro isn’t this Christmas, it’s next spring. That’s when the first installment of the next Star Wars movie trilogy opens. Hasbro owns the licensing rights to Star Wars toys, and new models based on the upcoming movie already are hitting the stores.

Jim: That’s a tremendous asset, and a key reason I’d buy this stock. I like Hasbro’s prospects and, at the stock’s current price in the mid-30s, it’s ready to move up.

Mike: I agree, but the story was sure different this summer.

Jim: Yeah, the stocks of Hasbro and Mattel got hammered after retail kingpin Toys R Us, which has struggled with its own slow growth, decided to clear out its old inventory even faster than planned and will have less merchandise in its stores. That forced Mattel and Hasbro to take big charges and spawned stories about whether our whole notion about toy retailing had undergone some seismic shift.

Mike: Not to our kids, it hasn’t.

Jim: It’s true that people now buy more toys from mass merchandisers such as Wal-Mart and Target Stores than before. But as that shift sorts itself out, it will be more of a problem for Toys R Us than for Hasbro or Mattel. The simple fact remains that Hasbro is now one of only two major U.S. toy makers, and it will be in good shape once Toys R Us finishes its inventory adjustment.

Mike: In addition, Hasbro has been buying up what few rivals remain, such as Tiger Electronics and, more recently, Galoob, which also has part of the Star Wars business and makes Micro Machines toys.

Jim: Plus Hasbro currently sells for only 22 times this year’s earnings, so it’s relatively inexpensive, although it has jumped 13% since mid-October. And Hasbro has no debt.

Mike: This stock is indeed attractive. Star Wars is going to be one powerful product. This company is smartly managed, and it’s in position to make all the money it can from Star Wars and other good properties. I think 1998 was a bad year for Hasbro and Mattel, but 1999 looks very good, and now is the time to buy.

Jim: Especially before the Star Wars hype really gets out of control. One warning, though: Don’t be surprised if the stock takes a brief hit if some analyst starts publicly fretting that Christmas sales won’t meet expectations. This is a stock you’re buying for next year.

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Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at [email protected]; James Peltz can be reached at [email protected]. Or write to either at Business Section, Times Mirror Square, Los Angeles, CA 90053.