RECENT POSTS
Thursday, March 21, 2019
Tech Data’s Goodwill Adjustment

Tuesday, March 19, 2019
There’s Taxes, and There’s Taxes

Saturday, March 16, 2019
Adventures in Tax Cuts and Net Income

Monday, March 11, 2019
Big Moves in Goodwill, Intangible Value

Friday, March 8, 2019
CVS, Goodwill, and Enterprise Value

Thursday, February 28, 2019
Summary of Our Goodwill Research/ How-To

Wednesday, February 27, 2019
What Does ‘Other’ Mean? An Example

Thursday, February 21, 2019
Another Tale, Buried in the Footnotes

Wednesday, February 13, 2019
Low Latency Calcbench

Monday, February 11, 2019
Now Streaming on Hulu: Red Ink

Thursday, February 7, 2019
Early Look at 2018 Tax Decline

Wednesday, February 6, 2019
You Revised WHAT, Netflix?

Thursday, January 31, 2019
Talking About Huawei Exposure

Wednesday, January 30, 2019
Another Discrepancy in Reported Numbers

Wednesday, January 30, 2019
Finding Revised Facts: Hertz Edition

Wednesday, January 23, 2019
GE Commercial Aviation Services: Bringing Numbers to Light

Monday, January 21, 2019
Differences in Earnings Releases and 10-Ks

Wednesday, January 16, 2019
The Importance of Textual Analysis

Tuesday, January 8, 2019
A Look at Climate Change Disclosures

Wednesday, January 2, 2019
Quants: Point-in-Time Data for Backtesting

Archive  |  Search:
Campbell Soup: Looking Behind the Label
Thursday, December 6, 2018

From time to time at Calcbench we sound a somewhat skeptical note about how much longer many companies can keep the good economic times rolling. Today Campbell Soup ($CPB) filed its latest quarterly report, and it demonstrates a few examples of the pressures we see.

At the top line, revenue growth looks good — up 24.6 percent, to $2.7 billion. Except that growth largely comes from two acquisitions Campbell closed earlier this year. Organic growth fell 3 percent.

We watch Campbell Soup because it relies heavily on aluminum for its soup cans, and we’re mildly obsessed with the Trump Administration’s tariffs on raw materials like aluminum. So we’re always looking for materials-heavy companies to see how their cost of revenue numbers are changing. The theory being that their costs may be rising due to tariffs and other expenses, eating away any revenue growth they see.

Well, Campbell saw big jumps in cost of revenue (up 35.7 percent), and marketing costs (up 13.2 percent), and administrative costs (up 18.1 percent). Throw in some restructuring charges, a slight trim in R&D costs, and you end up with total costs rising 34 percent — well above that 24.6 percent increase in revenue we just mentioned. See Figure 1, below.



In other words, those acquisitions earlier this year have Campbell working harder just to stay in place. Yes, that’s allowed to happen right after a large acquisition, since integrations are not easy. Still, financial analysts might want to tuck that fact away for a few quarters, to see whether the synergies Campbell promised at time of the deal closing actually come to pass.

Then we get to taxes. Yes, Campbell enjoyed a nice boost this year thanks to the corporate tax cuts Congress enacted last year. But in that case do the math—

  • One year ago, before the tax cut, Campbell had $382 million in pre-tax earnings;
  • Campbell paid $107 million on that amount, a tax rate of 28 percent;
  • This year, after the tax cut, Campbell had $257 million in pre-tax earnings;
  • Campbell paid $63 million on that amount, a tax rate of 24.5 percent.

So if we had never passed a corporate tax cut, and Campbell had to pay the same 28 percent rate on this year’s $257 million in earnings — that would be $72 million in taxes, and cut its net income from the $194 million it actually did report to $185 million.

In other words, the tax cut is propping up Campbell’s net income because organic growth isn’t there. You could also argue that the M&A deals earlier this year propped up revenue growth.

And once those tax cuts and M&A deals aren’t there — what happens then?

In theory, what happens is Campbell continues to remake itself away from a seller of soup to a seller of soup, snacks, and other food products. (The acquisitions earlier this year were in the snack business.) That is somewhat happening: soup sales actually fell in Q3 2018 compared to one year ago, while snack and other meal categories boomed (thanks to the acquisitions).

Will Campbell’s continue to pull off that re-engineering? Let’s hope so. 2018 was tough on Campbell: its share price steadily declined from $50 one year ago to $38 today.

One might even say Campbell got crunched like, well, an empty can.


FREE Calcbench Premium
Two Week Trial

Research Financial & Accounting Data Like Never Before. More features and try our Excel add-in. Sign up now to try the Premium Suite.