2

Executive Summary November 1, 2006 – Over-valued, Sell

Executive Summary November 1, 2006 CPB - NYSE 37.27 EPS Forecast FYE 2006 2007 2008 200952 week range $28.88-$38.49 EPS 1.88 1.65 1.79 1.92Revenue (2005) $7,072,000,000 Valuations Market Capitalization $15.56 bill. Trailing P/E 21.03 Enterprise Value $17.45 bill. Forward P/E 19 Shares Outstanding $407 million PEG ratio (5yr) 2.79 Dividend Yield .80 (2.10%) Price/Sales 2.05 3-month Avg Daily Trading Volume 1,758,110 Price/Book 12.05 Percent Institutional Ownership 41.10% Intrinsic Valuations Book Value Per Share $4.34 Discounted Dividends $11.83 ROE 81.00% Free Cash Flows $33.71 ROA 10.40% Residual Income $31.52 5 year avg. P/E ratio 17.60 Abnormal Earnings Growth $32.22 Cost of Capital Est. R2 Beta Ke Long-Run RI Perpetuity $20.57 Ke Estimated 10-year 6.01% 5-year 1.30% 1-year 6.13% Beta 0.57 Published Beta 0.37 Kd 5.90% WACC 5.92%

3

Business/Industry Analysis

Campbell’s Soup Co. a leader in the processed and packaged food industry

has been doing just that for over 125 years. Campbell’s currently has a market

capitalization of 15.56 billion. Campbell’s has been competitive in this market

since its beginnings. However, a great deal about Campbell’s has changed since

then. In 1904 Campbell’s was proud of their product line involving 21 varieties

of soups. This variety was the focus of their advertising at the time. Aggressive

advertising since their beginning has helped to establish Campbell’s as being one

of the most widely recognized brand names by the American general public.

Today Campbell’s not only offers a larger variety of different soups, it also

offers a variety of different brand names that have been acquired over the years.

In order to keep up with industry innovations and overall change over time it has

been important for Campbell’s to seek other areas of opportunity. Campbell’s

currently owns Prego, Pace, Godiva, Swanson, Pepperidge Farm, and other like

companies that all help Campbell’s to stay competitive in their industry. We can

see from the brands that Campbell’s not only offers different genres of food,

(Pace – Mexican, Prego – Italian) but also different areas of the cooking process

(Swanson – broths). Campbell’s also is committed to finding ways to produce

healthier foods in order to compete in that niche market as well.

Campbell’s is one of seventy-eight companies in the processed and

packaged foods industry. There are

four companies with more market

capitalization than Campbell’s Soup Co.

The three main competitors within the

industry are; Heinz, Kraft, and General

Mils. The current industry statistics are

as follows;

Market Capitalization: 282B Price / Earnings: 12.1 Price / Book: -58.1 Net Profit Margin (mrq): 8.8% Price To Free Cash Flow (mrq): 508.2 Return on Equity: 25.6% Total Debt / Equity: 0.9 Dividend Yield: Finance.yahoo.com

2.7%

Industry Statistics

4

The processed and packaged food industry has out performed the S&P

500 over the last three months. The following chart will display how Campbell’s

has measured up against its main competitors in the industry as well as the S&P

500 over the last three months.

5

In 1869, Ulysses S. Grant was sworn into the Presidency and the last

stake was driven into the transcontinental railroad. In that very same year, two

men both with great entrepreneurial spirits, came together to form a business

that would grow to become one of the most recognized companies in the world:

Campbell Soup Company. The business began producing canned tomatoes,

vegetables, jellies, soups, condiments and minced meats. In the 1930’s,

Campbell entered into radio sponsorships, using their now world

renowned jingle, “M’m! M’m! Good!” to captivate listeners. Even

today with television adds Campbell’s Soup makes its way into

our homes with young kids dancing to rap songs on the screen.

In 1898 a company executive attended a very big rivalry game

between Cornell University and the University of Pennsylvania. The executive

was so excited about Cornell’s new red uniforms he convinced the company to

adapt the white and red colors as their new official colors of the

cans we still see today.

Campbell has always put a great deal of emphasis on

advertising and appealing to the blue-collared hard working

Americans, sponsoring programming like Lassie, Peter Pan and

the Campbell Playhouse radio series. They created more jingles

for Americans to remember such as, “Wow! I could’ve had a V8!” and “Uh-oh

SpaghettiOs”. Campbell has reached out all over the world providing their

products to customers in nearly every country in the world! Campbell’s Soup has

even regional varieties like Duck-Gizzard Soup in China and Cream of Chili

Pablano soup in Mexico. Continually striving to make Campbell’s Soup brand the

quick, easy and inexpensive way to get great soup, the brand

has introduced new and interesting ways of keeping up with

the times. In 2004, Campbell’s Soup Company celebrated its

50 year anniversary of listing on the New York Stock

Exchange.

6

The Five Forces Model

Rivalry Among Existing Firms:

The consumer packaged goods industry is a highly competitive market

since there are so many different players. Campbell’s owns about 70% of the

soup market in the U.S. but has many competitors, such as Kraft, General Mills,

and Heinz. In today’s markets, brand loyalty is suffering, and retailers are trying

to come up with the next big thing. The trend has been becoming more

competitive between categories instead of competition between brands.

To remain competitive in the consumer packaged goods industry,

companies must look at and evaluate their supply chain to eliminate inefficient

methods and maximize value. They also must compete in price wars to try and

take away some of the market share from their competitors. Since there is a

growing dominance of large retailers who are selling these products to

consumers, they are equalizing the balance of power between consumer

packaged goods companies and retailers, giving the customer greater power.

To compete in this market, a firm would have to have a substantial

amount of startup capital, and a well defined marketing strategy. Firms that

have been continuously successful in the consumer packaged goods industry

have had to come up with bigger and better ideas than their competitors to keep

up with ever changing consumer demands.

Net Sales 2004

Cambel l 's13%

Heinz14%

Kr af t53%

Gener al Mi l ls20%

Net Sales 2005

Cambel l 's12%

Heinz14%

Kr af t55%

Gener al Mi l ls19%

Net Sales 2006

Cambel l 's12%

Heinz14%

Kr af t55%

Gener al Mi l ls19%

7

Threat of New Entrants

Campbell’s and its competitors enjoy advantages in the consumer

packaged goods market. New firms wanting to enter this market will face large

economies of scale, which will require a large amount of startup capital. New

firms would be lagging behind without an established brand name or consumer

brand loyalty. Another barrier to entry would be the fact that it is difficult to take

the shelf space of established brands. Wal-Mart is their largest buyer and it

would be difficult for a small start up company to get the distribution chain that

Campbell’s has. Getting into this industry as a start up company would be nearly

impossible as these companies have a long history and a well established market

position.

Threat of Substitute Products In the processed and packaged foods industry the threat of substitute

products is obviously a relevant threat to any of the industry players. The main

difference in products in this industry is simply by name and/or price, which

leads to consumers’ indifference between products at some point in their buying

process. In the modern processed and packaged foods industry it seems as

though brand loyalty is suffering, which is leading to increase in substitute

products. This is driving margins down, as there is an increase in marketing costs

that arise from firms trying to differentiate their products. Also, companies are

spending a great deal of money trying to come up with the next “hot” product

that would give them a competitive advantage.

A relatively new trend in this industry comes with a more health conscious

consumer bases. General Mills seems to be leading the change with their Betty

Crocker line which makes the Progresso Soup. Progresso Soup has recently

implemented an aggressive marketing strategy which targets health conscious

8

consumers. Given the room for expansion in the processed and packaged foods

industry, the switch to health food seems to be an area prime for new substitute

products.

Even thought the threat of substitute products exists at a high level in the

processed and packaged foods industry there is most definitely room for firms to

be successful. The main way to maintaining marketshare is through extensive

marketing campaigns and new product development. It seems that if a firm is

successful at one of these two measures they should have a competitive

advantage and limit their risk to substitute products for a short period allowing

them to have good profits until the industry adjusts.

Bargaining Power of Buyers

In the processed and packaged foods industry, generally the firms do not

directly set prices to the consumer. Wal-Mart is the largest buyer of the industry

goods and they set prices based on the contracts they enter into with the

individual firms. Generally, the contracts will have clauses to/for both parties

limiting the sell price to the public and other retailers. Wal-Mart can be used as

another example here. Their contracts commonly state if a firm sells their

product to another retailer at a lower price than they have agreed upon with

Wal-Mart, Wal-Mart has the right to pull the product from their shelves. This

being the case, the industry as a whole has limited bargaining position with the

mass retailers.

Given the way the products are sold to consumers in the processed and

packaged foods industry it is in each firm’s interest to enter into contracts that

allow for attractive prices to consumers. If the prices are set too high, consumers

will obviously find substitute products which will eventually lead to retailers

paying less or not choosing to renew contracts with firms.

9

Bargaining Power of Suppliers

In this industry there are two main types of supplies needed by the

companies. First they purchase the necessary ingredients for the foods they are

processing such as; vegetables, grains, sugars, etc. The companies also need to

be supplied with the materials necessary for packaging the foods they process.

Examples of these materials would be card boards and types of metals.

This is an industry where the companies such as Campbell’s, or their

designated buyers, have more bargaining power than the companies supplying

their needs. The reason behind this is that for the most part, all the necessary

supplies are commodities and there are a large number of suppliers to choose

from. This gives the companies in this industry the opportunity to buy at the

price and quantity of their choice based on the fact that the suppliers are

competing for their business.

Value Chain Analysis

When looking at the key factors of the industry we can see a few

important points. First, we see that competition among existing firms is high.

However, there is relatively no threat of new entrants. We also find that there is

a relative threat when it comes to substitutes. Another important fact to look at

is that the buyers do have power of the companies in this industry. The

reasoning for this as explained above is that this industry is not selling directly to

the consumer but to other companies such as Wal-Mart. It is important to note

that the suppliers for this industry have a relatively small amount of bargaining

power.

When we look at these five forces we see that three of the five indicate

high competition in the industry. So, when developing a strategy to compete

with the other companies in this industry it is important to look at what existing

firms are doing, how one can keep up with substitutes in the market, and how

10

one can develop the best relationships with those purchasing mass quantities of

a product.

First, we look at the competition among the firms in this industry. The

main companies are Kraft, Campbell’s, General Mills, and Heinz. All of these

companies have diversified themselves to process and package many different

types of food. While these are areas one company may be known for, they are

likely competing in the other areas of this industry. To be competitive in this

area of the industry it is important to be able to compete on price and have a

wide range of products.

The second area of competition within this industry is the threat of

substitutes. For this industry, substitutes can be identified as healthy versus

non- healthy and gourmet versus regular etc. So, in order to succeed in this

area it is important that a company has diversified product lines. People will

always buy food, but to be successful, a company in this industry will need to be

able to produce the kinds of foods that people are currently looking to buy.

The last important area to look at in order to create value for a company

in this industry is the bargaining power that the buyers have. The largest buyer

for this industry as mentioned before is Wal-Mart. Wal-Mart is well known for

purchasing the quantities of a product they want for the price they want. To

succeed in this industry it is important to set up a management team that can

get the prices set with buyers such as Wal-Mart that can best benefit your

company. It is also important to look at all of the super markets and make sure

your products are well positioned on there shelves as well.

Competitive Advantage Analysis

Having the processed and packaged foods industry broken down, we can

now focus on what strategies Campbell’s soup company has implemented to stay

competitive in this industry.

11

Campbell’s recognizes that cost leadership gives them the advantage of

achieving superior performance compared to their competitors. This is an

element of cost leadership that Campbell’s Soup Company uses in economies of

scale. Through research of Campbell’s 10-K’s we see that they have invested

heavily is warehouses, machinery and other physical assets for their business.

We also see they have invested heavily in advertising and R&D. Making a

commitment to all these areas of their business is giving Campbell’s a

competitive advantage.

While Campbell’s does use elements of cost leadership to create a

competitive advantage, their main focus is on differentiation. Elements of

differentiation Campbell’s uses to create a competitive advantage are the variety

of their supply, their brand name, the quality of their goods, and the quality of

their services. When considering the variety of their supply, we see that

Campbell’s offers over ten different brand names in 120 different countries. Each

brand sells a variety of individual products. In 2004 Campbell’s decided to

expand its well known brands in the simple meal baked snack categories.

Campbell’s has the ability to compete with other industry leaders in many areas.

Some of the other brand names Campbell’s owns are Prego, Pace, Pepperidge

Farms, and many others; thus making them very diversified within their industry

and able to compete in all areas of food production.

As far as Campbell’s desire to use their brand name for a competitive

advantage we first look at their history. Campbell’s Soup Company is over 125

years old and for 100 years Campbell’s executed ads and marketing campaigns

to present an all-American image. Campbell’s works hard for many charitable

causes including children’s hunger concerns and diversity in the work place.

Campbell’s also owns over 6,900 different trademark registrations and

understands their importance to the success of the company. Campbell’s has a

long history of quality foods and selfless acts that make them a very recognized

brand name.

12

When looking into the quality of Campbell’s goods we first see that they

have been dedicated to this element of differentiation for 125 years. Second, we

look at their dedication to only using the finest ingredients and that they have

been and still are very selective in the process of finding suppliers. When it

comes the quality of their service we also find information on the website and

mission statements indicating desire to perform their service in the most efficient

and productive way. Campbell’s believes in taking the time to make sure all their

employees know the history of the company that they are working for.

(www.campbellsoupcompany.com, Campbell’s 2005 10-k footnotes)

13

ACCOUNTING ANALYSIS

Key Accounting Policies

When looking into Campbell’s accounting policies there are important ones

to highlight which identify how they are relating the inner workings of their

business to keep a competitive advantage. We will look at their policies that

show their economies of scale, the elements of their supply, their brand name,

and the quality of their goods and services.

First, we see that in 2003 Campbell’s adopted SFAS. No. 142 which

eliminates the amortization of goodwill and other infinitely lived intangible assets.

Now goodwill and other intangibles are tested for impairment. The prior periods

were not restated. We also have found that they follow SFAS. No.151 requires

abnormal amounts of idle facility expense, freight, handling costs and spoilage to

be recognized in that current period. Another element of Campbell’s accounting

we find is that each major segment of Campbell’s soup from factories in the U.S.

to Asia’s Pacific region are evaluated individually in Campbell’s accounting

policies based on their earnings before interest expense and taxes. It is also

important to state that through Campbell’s financial statements we see that they

increased advertising and also the prices of soups. These actions are attributed

to the increase in the sales of U.S. condensed soups. We can also see that

marketing expenses rose 3% in 2005 and was attributed to higher levels of

advertising and currency.

We also found that the administrative expenses increased in 2005. Two

percentage points of the increase can be attributed to the implementation of an

enterprise resource planning system. Campbell’s has increased R&D expenses

14

8% since 2003. Four of these percentage points can be attributed to currency

the other 4 points are due to their dedication to be innovative in their industry.

Campbell’s issued SFAS No. 123R in 2004 which involves their share

based payments. It requires their employee’s stock-based compensation to be

measured based on the grant date fair value of the award. Before this Campbell’s

used APB No. 25’s intrinsic value method. This however is the company’s policy

for stock options

Degree of Accounting Flexibility

We can look at several different elements of Campbell’s accounting

policies in order to determine the degree of their flexibility. There are many

policies that they have choices between as well as those that are mandatory. It

is also important to state that Campbell’s has the ability to determine the amount

of inventory they need to produce based on past business relations and

contractual obligations they have with companies such as Wal-Mart. Campbell’s

does not directly sell to the customer so it is easy for them to produce the right

amount of merchandise. Due to this the decision of LIFO or FIFO is not as

crucial as it may be for companies that do not know how fast they will get their

product off the shelf.

When we look at all the other previously mentioned policies we see that

Campbell’s does have a relatively good level of flexibility. We can see this

because there are different policies for Campbell’s to choose from. While they do

have to declare how they are going to account for advertising, goodwill, R&D,

and employee compensation, there are different legal policies developed through

the SFAS and APB that they can use depending on how they want to depict their

business actions to those of concern.

15

Accounting Strategy

After determining what accounting policies Campbell’s is using it is

important to evaluate how these strategies aid their competitive advantages as

well as to see how these accounting activities match up against strategies of the

rest of the industry.

First, we see that by using SFAS 142 Campbell’s is able to get the highest

possible benefit from their brand name. SFAS 151 is also a policy that protects

the quality of their goods due to the fact that un-saleable goods are accounted

for in the same period they are recognized as un-saleable. We can also relate

the expenses they have recorded over the past years to the desire to seek

advantages through advertising, R&D, and growing the physical assets of their

business.

When comparing Campbell’s accounting policies to the rest of the industry

we see that the companies of this industry are dedicated to R&D which is linked

to innovation in this industry. This industry is also an industry in which

intangibles such as brand name are important. We see that other companies in

this industry such as General Mills have also recently adopted SFAS No. 142 as

their policy for goodwill and other intangibles.

Qualitative and Quantitative Analysis

The qualitative and quantitative analysis can be helped along after

evaluating certain ratios that are easily manipulated by management. We will

begin by taking a look at sales ratios for Campbell’s Soup, Kraft and General

Mills.

16

Campbell's Soup (sales) 2001 2002 2003 2004 2005 Net Sales/ Cash 1.0829 1.073 1.0659 1.074 1.0723 Net Sales/ Net Acct. Rec 13.0566 14.7074 16.1695 14.5082 14.8291 Net Sales/ Inventory 9.667 9.6129 9.4189 9.0908 9.6522 Kraft (sales) 2001 2002 2003 2004 2005 Net Sales/ Cash 1.1177 1.117 1.1242 1.1237 1.1102 Net Sales/ Net Acct. Rec 9.4931 9.9519 9.0525 9.0844 10.0777 Net Sales/ Inventory 9.8225 9.1691 9.1229 9.3322 10.2043 General Mills (sales) 2001 2002 2003 2004 2005 Net Sales/ Cash 1.24 1.27 1.27 1.23 1.22 Net Sales/ Net Acct. Rec 10.33 8.21 7.87 10.72 10.96 Net Sales/ Inventory 10.13 10.5 7.53 9.71 10.41

The sales ratios for the industry are consistent across the board. From

these ratios, we decided to focus on the trend of Campbell’s increasing net sales

to net accounts receivables. As a whole the industry increased this ratio from

2001 to 2005. The other two ratios are comparable to Campbell’s main

competitors.

Campbell's Soup (exp) 2001 2002 2003 2004 2005 Sales/ Assets 0.9737 1.072 1.0762 1.0671 1.1139 CFFO/OI 0.0579 0.0681 0.0564 0.0485 0.0563 CFFO/NOA -0.1255 -0.2544 0.0827 0.0366 0.0315 Kraft (exp) 2001 2002 2003 2004 2005 Sales/ Assets 0.5327 0.5431 0.5144 0.5368 0.592 CFFO/OI 0.9695 0.8031 0.7029 0.869 0.729 CFFO/NOA 0.0002 0.00016 0.00014 0.00013 0.00012 General Mills (exp) 2001 2002 2003 2004 2005 Sales/ Assets 1.13 1.07 0.48 0.58 0.6 CFFO/OI 0.005 0.006 0.054 0.163 0.038 CFFO/NOA 0.003 0.003 0.011 0.039 0.009

As one can see from these numbers, Campbell’s ratios seem to be fairly

consistent and close to its competitors. We specifically feel that the trend of

increasing sales to assets for Campbell’s, is a sign of efficient management

17

strategies. Kraft’s same ratio has not been overly consistent and General Mills’

ratio drastically declined from 2001 to 2005.

Degree of Disclosure

After carefully analyzing Campbell’s policies and strategies it is important

to see how committed Campbell’s is to reporting beyond basic GAAP. We find

this information in footnotes and Campbell’s letters to its shareholders.

Campbell’s lays out its plans carefully as well as its strategies in its annual

letters to share holders. We see Campbell’s desire to become more competitive

of some areas of the industry and defend the economic consequences of

investing in these areas. Some of the particular strategies currently detailed by

Campbell’s is their desire to achieve in the simple and baked foods areas, to

become more price competitive, and to reach customers in new places.

When analyzing Campbell’s 10-K and researching their accounting

strategies we have found that Campbell’s does an above average job of

disclosing information in footnotes. Throughout their 10-K they are careful to

note on every percentage change rather is an increase or decrease. They also go

into detail about the different elements that caused the increase or decrease.

Through these footnotes as detailed strategies Campbell’s does a good job

of disclosing more than just the information required by GAAP. All part of their

current performance is noted and detailed.

Potential Red Flags

After carefully comparing and analyzing Campbell’s past yearly and

quarterly statements, we have made the decision that their accounting records

and practices are in fact correct and consistent based on GAAP. We also feel that

their books do not reflect any discrepancies such as; managers desire for better

compensation, large 4th quarter write offs, unexplained substantial increase in

revenue, etc. It is also important to note that Campbell’s has substantial footnote

18

information describing the accounting policies. While Campbell’s has had gains

and losses over the years we feel to the best of our knowledge all of these gains

and losses coincide with the market activity for that particular year.

That being said, there are a few areas worth noting. In 2003 the

company sales appeared to be overstated by 2% points. However, it was

disclosed that the reason for this fluctuation is because 2003 consisted of 53

reported weeks instead of 52 so there is no distortion to undo. It is important to

recognize the reason 2003 is 2% points higher. Also, we can see through the

company’s financial statements that in 2006 their cash and cash equivalents

increase by several million dollars over the past trends. The reasoning for this as

stated by Campbell’s is that they sold off a large amount of physical assets.

19

Ratio Analysis

One of the most important aspects of financial statement analysis is using

public information to make accurate forecasts of future expectations. After the

ratios and forecasts have been made, one can asses how well a company is

performing based on the industry standards. This is extremely important for

investors to consider when they evaluate a company for particular investment

goals.

Liquidity Ratios 2002 2003 2004 2005 2006 Current Ratio 0.45 0.46 0.63 0.74 0.71Quick Asset Ratio 0.16 0.16 0.22 0.27 0.39Efficiency Ratios Accounts Recievable Turnover 14.71 16.17 13.59 13.89 14.86Accounts Recievable (days) 24.82 22.57 26.85 26.27 24.56Inventory Turnover 5.40 5.37 4.91 5.54 5.86inventory (days) 67.64 68.01 74.37 65.83 62.26Working Capital Turnover -0.47 -0.41 -0.42 -0.35 -0.16Profitability Ratios Gross Profit Margin 43.86% 43.02% 41.41% 40.96% 41.88%Operating Expense 27.82% 26.47% 25.83% 24.96% 26.20%Net Profit margin 8.56% 8.91% 9.71% 10.00% 10.43%Asset Turnover 1.07 1.08 1.00 1.04 0.93Return on Assets 9.18% 9.59% 9.69% 10.43% 9.73%Return on Equity (4.61) 1.54 0.74 0.56 0.43 Capital Structure Ratios Debt to Equity -51.18 15.03 6.64 4.34 3.45Times Interest Earned 5.20 5.97 6.00 6.17 7.07Debt Service Margin 53.20% 40.10% 49.00% 92.00% 47.60%Other Ratios Operating ROA 3.70% 3.30% 3.00% 2.60% 2.70%Accounts Payable Turnover 174.00% 288.00% 297.00% 517.00% 995.00%PPE Turnover 353.00% 372.00% 362.00% 374.00% 381.00%Dividend Payout Ratio 0.1238 0.1092 0.1005 0.099 0.0966Retention Ratio 0.8762 0.8908 0.8995 0.901 0.9034

20

Liquidity

Campbell’s liquidity is primarily based on two ratios, the quick and current

ratios. Traditionally, the current ratio has hovered from .39-.63. This means that

Campbell’s generally has had slightly more current liabilities than current assets.

A current ratio in this range suggests that Campbell’s is fairly illiquid. When the

quick asset ratio is evaluated one would notice a ratio that has historically

remained close to .2. The ratio has been increasing at a fairly low value. In 2006

the ratio dramatically increased due to the influx in cash from the sale of assets.

The quick asset ratio is a good indicator of assets that could be used to meet

short-term liabilities. Two more ratios that are useful to concentrate on are the

accounts receivable and inventory turnover ratios. These ratios for Campbell’s

remain fairly low when compared to companies similar in size. However, this is

generally the case for companies in the processed and packaged food industry.

This is due to companies producing products that expire by a certain date. As an

investor you would like to see these ratios as low as possible because that would

suggest a popular product that consumers value highly. Also, there are low profit

margins for a company like Campbell’s, so obviously the more items sold the

better.

Profitability

Generally speaking Campbell’s has been a profitable company in a

competitive industry. The industry will allow for a company to enjoy short-term

success that is derived from a new product or strategy before it becomes an

industry standard and margins are brought back to a normal level. There are a

few ratios that are particularly helpful while reviewing the profitability of a

company. To start the discussion, we can focus on the gross profit margin which

is simply the gross profit over the sales. The industry trend for this ratio is

anywhere from 20%-50%. Campbell’s comes in with a gross profit margin in the

range of 40%-45%, which is close, if not an industry best. Operating expense

21

ratio provides a measure of the level of efficiency of a particular firm. Campbell’s

operating expense ratio based on past performance really has not been overly

predictable, but has floated close to the industry average. This evidence

suggests that they are doing an average utilizing their funds. While assessing

other key ratios, we found Campbell’s has had sporadic results which does not

build our confidence in their operations.

Capital Structure

One area that worries us is the debt to equity ratio, which is simply, total

liabilities over total shareholder’s equity. In 2002 the ratio is extremely high

which alarms us. Also, after 2003 the ratio dramatically decreases to a more

reasonable rate but based on past performance, we strongly feel this is a

troubled area. A high debt to equity ratio suggests that Campbell’s is

aggressively financing their growth with debt. This might explain their volatile

earnings growth.

22

Cross Sectional Analysis

Liquidity Ratios

Current Ratio

Campbell’s is showing a lower current ratio than the industry as a whole.

They also show that the ratio is increasing, which means they will have more

short-term assets to pay off their short-term liabilities.

Current Ratio

0.000.200.400.600.801.001.201.401.601.80

2001 2002 2003 2004 2005

CampbellsGeneral MillsKraftHeinzIndustry

Quick Asset Ratio

Campbell’s has a lower quick asset ratio than the rest of the market. This

is a good measure of liquidity, because it takes out inventories from current

assets. Just like the current ratio, Campbell’s quick asset ratio shows to be

increasing as they are becoming more liquid.

Quick Asset Ratio

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2001 2002 2003 2004 2005

CampbellsGeneral MillsKraftHeinzIndustry

23

Efficiency Ratios

Accounts Receivable Turnover

This graph shows that Campbell’s account receivable turnover is clearly

higher than the industry. Campbell’s has a higher percentage of sales on terms

rather than cash in advance. This also is an indication that Campbell’s is

competing with longer sales terms as well as price.

Accounts Receivable Turnover

0.002.004.006.008.00

10.0012.0014.0016.0018.00

2001 2002 2003 2004 2005

CampbellsGeneral MillsKraftHeinzIndustry

Inventory Turnover

As this graph shows, Campbell’s is on the same path as the rest of the

industry. Overall, the industry as a whole has a high inventory turnover ratio

which means that there are very strong sales.

Inventory Turnover

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2001 2002 2003 2004 2005

CampbellsGeneral MillsKraftHeinzIndustry

24

Working Capital Turnover

This graph states that Campbell’s has a slightly lower working capital

turnover ratio than the industry. They do not fluctuate very much with this ratio

which is used to analyze the relationship between the money used to fund

operations and the sales generated from these operations.

Working Capital Turnover

-60.00-40.00-20.00

0.0020.0040.0060.0080.00

100.00120.00140.00

2001 2002 2003 2004 2005

CampbellsGeneral MillsKraftHeinzIndustry

Profitability Ratios

Gross Profit Margin

This graph shows how Campbell’s leads the industry in their gross profit

margin. This graph shows very high revenues for each sale they make.

Gross Profit Margin

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2001 2002 2003 2004 2005

CampbellsGeneral MillsKraftHeinzIndustry

25

Operating Expense Ratio

Campbell’s seems to be slightly higher, but in line with the industry trend

for their operating expense ratio. Viewing the industry as a whole, the operating

expense ratio is relatively low, this could account for less expensive goods to

make the finished product.

Operating Expense Ratio

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2001 2002 2003 2004 2005

CampbellsGeneral MillsKraftHeinzIndustry

Net Profit Margin

Campbell’s is very main stream when comparing their Net Profit Margin to

the industry. Showing us how much money is profited off of every dollar it

generates in revenue. They stayed very consistently on top between 8.5-9.5% of

sales in Net Income.

Net Profit Margin

0.00%

5.00%

10.00%

15.00%

20.00%

2001 2002 2003 2004 2005

Year

Campbell'sGeneral MillsKraftHeinzIndustry

26

Asset Turnover

Here is an area where Campbell’s has dominated the competition in the

past. Asset turnover measures how much Campbell’s can generate in sales by

spending one dollar on assets, which is a clear part of the company’s success.

Asset Turnover

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2001 2002 2003 2004 2005

Campbell'sGeneral MillsKraftHeinzIndustry

Return on Asset

Campbell’s continues to be more than competitive outperforming the

industry. ROA is a very important indicator of profitability because it measures

how efficient management is at using assets to generating earnings. Stability in

this chart shows the steady growth of Campbell’s and suggests that it will

continue.

Return on Asset

0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%16.00%18.00%

2001 2002 2003 2004 2005

Campbell'sGeneral MillsKraftHeinzIndustry

27

Return on Equity

Campbell’s struggled with ROE five years ago but has made a huge turn

around and is second in the industry. This makes shareholders a bit nervous

because ROE measures how profitable a company is with shareholders

investments. This is a very important ratio that Campbell’s needs to continue to

improve on.

Return on Equity

-6.00%-4.00%-2.00%0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%

2001 2002 2003 2004 2005

Campbell'sGeneral MillsKraftHeinzIndustry

Capital Structure Ratios

Debt to Equity

Campbell’s does not follow its steady historic predictable ratios here. The

company has not always kept a good equity to liabilities ratio which indicates

instability. Shareholders would rather see a high Debt to Equity ratio resulting in

more profits spread over a lower number of investors.

Debt to Equity

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

2001 2002 2003 2004 2005

Campbell'sGeneral MillsKraftHeinzIndustry

28

Times Interest Earned

Campbell’s does exceptionally well in times interest earned providing us

with knowledge on earnings above what interest expenses are. This is a good

indication of stability showing investors that it will have no problem meeting its

debt obligations.

Times Interest Earned

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2001 2002 2003 2004 2005

Campbell'sGeneral MillsHeinzIndustry

Debt to Service Margin

No industry data could be found here making it impossible to compare to

industry.

Debt Service Margin

0.000.100.200.300.400.500.600.700.800.901.00

2001 2002 2003 2004 2005

Campbell's

29

Liquidity Ratios

Campbell’s does show to be less liquid than some of its competitors, but

they should be pleased to see that number rising in the near future. They saw a

growth from 0.46 in 2003 all the way to 0.74 in 2005. Since their current ratio is

less than one, they would not be able to pay off their short-term liabilities right

away, if required to do so. Campbell’s has a high enough current ratio and does

not have any major liquidity problems facing them. Campbell’s quick asset ratio

is still lower than the industry trends. The quick ratio measures a

company's ability to meet its short-term liabilities with its most liquid assets.

This is done by subtracting out inventory from the current assets; this in our

opinion is a better measure of liquidity since inventory is sometimes hard to turn

into cash. As we saw the current ratio increase, we are seeing the quick asset

ratio increase as well. The ratio has increased from 0.16 in 2003 to 0.39 in

2005.

Profitability Ratios

The profitability ratios are a way of explaining different profitability

aspects of the business. Gross profit margin is the gold standard because by

definition, it provides a good indication of the financial well-being of the

company. Although Campbell’s Soup Company has led the industry the past 5

years, they have shown signs of decline. Being consistently around 25% shows

that the mark up on Campbell’s products is fairly significant. Operating Expense

ratio gives a different approach in that it shows the cost of operating activities

compared to revenue, which in Campbell’s case is relatively high for the industry

but for business overall is low. Again, we should point out the steady decline by

Campbell’s the last few years. One ratio Campbell’s has always demonstrated

consistency is in net profit ratio, which is very important to investors because it

indicates how much profit is generated from one dollar of revenue. Staying at

the ten percent mark is a good estimation of what will come in the future. Next,

30

we have asset turnover ratio which gives investors an idea if any sales can be

profited by one dollar being spent on assets. Although we have noticed a

decrease over the past five years, Campbell’s still leads the industry with a

comfortable margin. Return on asset provides confidence for Campbell’s with a

high return on asset which is due to the management of the firm and their ability

to use assets to generate earnings. The last of the profitability ratios is the return

on equity, which makes us as investors weary of investing in the future of

Campbell’s Soup Company. We believe return on equity to be very important

because it provides data showing how profitable a firm is with the shareholders

investment.

Capital Structure Ratios

The capital structure ratios provide insight regarding how a company is

being financed. Using the debt to equity ratio, we can see how aggressively a

company is using primarily debt to spur growth. Campbell’s has a sporadic ratio

from 2001-2003, before it settles in near the top of the industry with a low debt

to equity ratio. Heinz’s ratio is a troubling sight. The times interest earned ratio

does a good job of explaining if a company is able to meet its debt obligations.

Campbell’s ratio is definitely more erratic and troublesome than any of its

competitors. We are not concerned with this ratio because Campbell’s has never

had any trouble paying off their debt. The debt service margin is the final capital

structure we evaluate. It is used to measure the amount of cash provided by

operations to cover annual installments on long term liabilities. Generally a

higher debt service margin is appealing. Campbell’s ratio is actually quite low

here and may be cause for concern.

31

Ratio/Financial Forecasts

Financial Statements Forecasting Methodology

After a deep look at Campbell’s business strategy, we decided to be very

conservative with our forecasts. We calculated their sustainable growth rate to

be close to 4.25%. This rate of growth is slightly less than an industry average of

approximately 7%. The packaged and processed food industry is extremely

competitive on several business factors. We decided to focus on a few

competitive factors that could limit growth, while we made our forecasts.

Specifically, we considered the effect, price wars, investments in brand image,

high product development costs, and products with little differentiation, would

have on future growth and earning potential. Price wars obviously limit profit

margins and can have a drastic effect on future earnings. We feel that

Campbell’s is somewhat protected from severe price swings, mainly because they

offer a high quality product that consumers are generally willing to pay for.

However, this does not come without costs elsewhere. Campbell’s spends a large

portion of earnings on marketing and advertising costs to ensure consumers feel

comfortable with their products. Another substantial percentage of funds go to

the research and development of new innovative products that offer higher

margins for Campbell’s. The goal of the extra spending on new products and

marketing is the direct effect of Campbell’s trying to differentiate their products.

Even with the considerations above, we feel there are certain

opportunities for Campbell’s to expand. First of all, we absolutely love the fact

that as of 1998, at least one Campbell’s products could be found in 93% of

American households. This might suggest that they have already lived up to their

potential in the US. However, recently there has been an increase in interest in

prepared meals, specifically, health foods. This is when the large allocation of

funds to advertising and product development can be described as adding value.

There is also significant room for Campbell’s products to grow overseas. They

are working on increasing their market share in Europe and Asia. Considering

32

Campbell’s world-class manufacturing and product development technologies we

feel this new focus should be profitable in years to come.

Balance Sheet Forecast Methodology

We started our forecasts with the balance sheet. We conservatively based

our forecasts for cash and equivalents on previous years cash and equivalents

over total assets and then took the average of the past four years with the 2006

left out because of inflated numbers, which gave us a percentage of .0049%. We

carried this percentage out until 2015. We based the accounts receivable

forecast on the accounts receivable turnover ratio, we also carried this out for

the duration of our forecasts. We used a similar methodology to estimate future

inventory levels, but used the inventory turnover ratio throughout. The next

forecast we made was concerning future current asset growth. We used the

common size balance sheet to assist us with this projection. This was derived

from the historical percentage of total current assets compared to total assets.

To predict our total assets, we took net sales divided by the historical asset

turnover average and imputed this out until 2015. Then we found our total non-

current assets by subtracting the difference between total assets and total

current assets. Obviously, the balance sheet must balance so we simply took the

total liabilities and shareholder equity and set it equal to total assets. For the

majority of the liabilities, our forecasts are based on the historical percentage of

a particular liability over total liabilities, averaged over the previous five years

and imputed throughout the forecast. Our total shareholder equity is the

difference between total liabilities and shareholder equity and total liabilities.

Common-Size Balance Sheet Forecast Methodology

Our forecasts for the common-size balance sheet are quite

straightforward. We simply took the forecasts from the balance sheet as a

33

percentage of total assets. This was carried out throughout the common size

balance sheet, assets and liabilities alike.

Forecasted Income and Common Size Income Statement

When forecasting the income statement, the most important factor is how

sales are forecasted. The reasoning for this is because almost all other variables

of the income statement can be accurately forecasted based on the historical

percentage of sales. Therefore, the growth rate chosen for net sales holds the

greatest influence over all other parts of the income statement. In order to

forecast the sales, we found the average growth rate which was approximately

seven percent. We forecasted sales by imputing this growth rate starting with

the last actual year sales.

Once the sales were forecasted, the common size income statement

comes into play for almost all of the other variables in the income statement.

When forecasting the income statement it is important to apply growth rates to

all variable within the income statement. Failure to do so will cause certain

numbers, such as net earnings, to grow at a much higher and unrealistic rate.

When looking at the common size statement one can see that the percentage of

sales each variable has is stable over time. Therefore, by letting net sales grow

and the rest of the variable grow based on their percentage of sales gave the

income statement the most realistic results.

In order to determine which percentage of sales that each variable should

have, an average percentage of the actual years was taken. The first forecasted

year’s percentage was the last actual percentage. All percentages for the

forecasted years after that are based on the average found. There were a few

variables that were not determined in the previously mentioned method. For

variables such as interest expense, income tax expense, or net earnings, this

forecasting method could not be used because they are developed by adding

other variables together or by multiplying by given rates.

34

The last part of the forecasted income statement was the numbers on a

per share basis. These numbers are determined by dividing the necessary

variables such as earnings, by the number of shares outstanding. The variables

such as earnings have previously been forecasted. The shares outstanding have

remained relatively steady through the years. So, in order to forecast the shares

outstanding we just used the average of the actual years for all of the forecasted

years.

Statement of Cash Flows

The statement of cash flows shows the inflow and outflow of money from

the balance sheet and income accounts and how they affect cash and cash

equivalents. It breaks these cash flows down into operating, investing, and

financing activities. Campbell’s statement of cash flows has consistently had a

net positive balance with cash flows from operating activities keeping Campbell’s

head above water.

We forecasted several key numbers in Campbell’s statement of cash flows,

avoiding the smaller, more volatile accounts. Net cash provided from operating

activities is forecasted by taking the forecasted net sales from the income

statement and multiplying it by the operating income percentage, which results

in a steady growth for operating cash flows in future years. Another important

account forecasted on the statement of cash flows is net cash used in investing

activities. This was forecasted by taking the growth average of the purchase of

plant and asset account and forecasting that account out for ten years. It

appears that this account will continue to cost the company money in the future

but not anything drastic. The net cash used in financing activities was forecast by

simply taking the forecasted dividend rate and multiplying it by the dividend

dollar amount which has been estimated for ten years also. Other accounts were

forecasted out although not as significant as the first three mentioned above.

35

Accounts receivable was forecasted by taking the previous year’s accounts

receivable on the balance sheet from the following year.

Cost of Capital

Cost of Equity

Finding cost of equity (Ke) and cost of debt (Kd) is the first step to

computing the cost of capital. Cost of equity is the amount of interest cost

Campbell’s will encounter when financing one dollar using equity. To find the

cost of equity, we begin by compiling a list of dates dating back five years. Then,

we researched and documented the closing stock price of Campbell’s Soup

Company as well as dividend payouts that coincided with the dates. We then

retrieved closing numbers from the S&P 500 and historical risk free rates on

those same dates. Next, we computed the monthly return for Campbell’s, the

S&P 500 as well as the monthly yields for the risk free rates. We could then find

the market risk premium by taking the monthly risk free yield from the monthly

S&P returns. At that time, we took the risk free rate and averaged them into

monthly terms. Next, we charted regressions for each of the three month, one

year, five year, and ten year risk free categories. The regressions were done in

twenty four, thirty six, forty eight, and sixty month periods dating back from the

most current month. We chose to use the regression model from the ten year

risk free yield due to the higher R squared. Once fully charted out we can clearly

mark out our beta and Ke.

Beta=0.565011578

Ke=6.01%

We have just calculated our cost of equity using the CAPM (Capital Asset

Pricing Model) at 6.01%. CAPM is the most common way to find a firm’s cost of

equity. CAPM formula:

36

Cost of Debt

To compute the cost of debt, we looked through all the footnotes of

Campbell’s annual report to find all the short-term and long-term amounts along

with their respective interest rates. Once we have assessed what weights go to

each liability we must find what weight each part of the debt carries compared to

total liabilities. We then found a value weighted interest rate by multiplying the

interest rate by the weight designated to it. Certain liabilities were not assigned

specific interest rates in the 10-K. In these cases we looked at the individual case

and how it affected the balance sheet. We either used the commercial paper

interest rate or used the risk free interest rate. An example below with “Non-

Current Liabilities of Discontinued Operations held for sale”, this item was not

given a specific debt interest rate so we took the weighted interest rate for long

term debt (5.73%) and used it for the calculation of WACD. The specific interest

rate for long term debt was 5.81%. Once we added all of the value weights

together we found the weighted average cost of debt to be 5.9%. This means

for every dollar financed using debt; the company is averaging $.059 of costs to

the firm.

Campbell's10-K 2005-01-30: Balance Sheet LIABILITIES AND STOCKHOLDERS EQUITY Interest Rate Amount Weight

Weight * Interest Rate

Notes Payable 6.00% $2,962,000,000 0.485414618 0.029124877Long-Term Debt (Note 19) 5.82% $2,116,000,000 0.34677155 0.020175169

Nonpension Postretirement Benefits (Note 10) 5.50% $278,000,000 0.045558833 0.002505736Other Liabilities 5.87% $721,000,000 0.118157981 0.006935873Non-Current Liabilities of Discontinued Operations held for sale 5.73% $25,000,000 0.004097017 0.000234759Total liabilities $6,102,000,000 WACD 5.90%

37

Weighted Average Cost of Capital

Once we have found our cost of equity and cost of debt, we can plug

those numbers into the WACC (Weighted Average Cost of Capital) formula to

find the WACC. This formula is as follows:

Vd= Value of Debt

Ve= Value of Equity

Kd= Cost of Debt

Ke= Cost of Equity

6,102,000,000 (0.059) + 1,768,000,000 (0.0601)WACC=

(6,102,000,000+1,768,000,000)

(6,102,000,000+1,768,000,000)

38

Valuations

When a company funds new assets it either does so with debt or equity.

WACC is the average of the costs of these two to acquire new assets. To better

determine how the company can finance assets we take the weights of all debts

and equity in each of their respected functions to determine how much interest

the company will incur for every dollar it finances. This in turn helps to much

more accurately determine the true market value of a firm.

It is in this section that we execute five different valuation models aimed

to try and asses the intrinsic value of Campbell’s Soup. The models we will be

using include, the free cash method, residual income, long run residual income

perpetuity, abnormal earnings growth, and last but not least, the dividend

discount model. After running the valuations we should be able to tell how the

company is intrinsically valued and then compare those results with the actual

market price. From there we will be able to make a call on Campbell’s regarding

the investment opportunity we determined exists.

Free Cash Flows Valuation

The method of free cash flows valuates a company by using the weighted

average cost of capital as well as the projected growth. We start by taking the

future cash flows from operations, then subtracting out the projected cash used

in investing activities. This assessment provides us with the free cash flows

estimate per year projected out to 2015.

Next we discount each free cash flow back to the present year and added

those numbers up to get our total present value of all future cash flows. After

that we use the last forecasted year’s cash flow to firm over our weighted

average cost of capital less the projected growth. We first plugged all of the

numbers into the valuation using zero growth. We then discounted back our

terminal value of continuing cash flows. We then take both the total present

39

value of all future cash flows and the discounted terminal value and add them

together to get the total value of the firm. We then subtracted the book value of

debt to give us the value of the firm. The value of the firm is divided by the total

number of shares outstanding to give us value per share. Using the zero growth

as stated earlier gave us a value per share of 17.59. After reviewing our

sensitivity analysis as well as various growth models for future cash flows we

decided to use a 2% growth rate. This values the firm’s stock at a fair $33.47.

The free cash flow valuation has given what we believe a fair value per

share for Campbell’s Soup Company. Using the free cash flow analysis shows

how sensitive this valuation is to change in growth. We did choose a

conservative growth rate but past history and future forecasts show this to be a

good choice. We do believe that this model puts too much emphasis on weighted

average cost of capital which is found by taking the weighted average cost of

equity less the weighted average cost of debt, as well as the estimated growth

for future cash flows, which are all estimated numbers.

Sensitivity Analysis g 0 0.01 0.03 0.05 WACC 0.03 $47.87 $78.57 N/A -105.61

0.04 $32.53 $47.87 $170.66 -197.7 0.05 $23.32 $32.53 $78.57 N/A 0.06 $17.18 $23.32 $47.87 $170.66 0.07 $12.79 $17.18 $32.53 $78.57

According to the sensitivity analysis, any change in the estimated growth has

extreme effects on the estimated value per share. The weighted average cost of

capital of .059 had a very fair outlook on the pricing and analyzing the sensitivity

analysis reveals that a shift to a slightly lower weighted average cost of capital

changes the valuation to under-valued. In order to meet the market price we

would need to increase our growth to .0235.

40

Residual Income Valuation

In order to get the intrinsic value of Campbell’s, based on the Residual

Income model, there were certain variables needed. The first variable needed is

the cost of capital. The cost of capital was determined by running regressions for

Campbell’s returns as well as the market returns. From these regressions the

weighted average cost of capital was determined and analyzed. After running

these regressions and establishing our WACC we attained variables such as cost

of debt and capital.

Another variable of the Residual Income valuation is the book value of

equity. The book value of equity for 2006 was determined by dividing

shareholders equity by the total number of shares. In order to determine the

beginning book value of equity for the following years we add earnings per share

to that year’s book value and subtract dividends per share. This gives us that

year ending book value of equity which is the next year’s beginning book value.

Earnings per share were determined by dividing the forecasted yearly net

earnings by the forecasted number of shares outstanding. The dividends per

share were determined by taking the average of the yearly dividends per share

for the past five years. Because the dividends Campbell’s pays have grown and

decreased over the years an average yearly dividend was determined and used

for all the forecasted years.

The next variable needed to complete the valuation is a growth rate. The

growth rate was determined by first finding how much residual income grew

between each forecasted year. After these growth rates were found they were

used to determine the average growth each year of the residual income. The

average growth rate was then used for the perpetuity part of the residual income

valuation.

41

All other variables used in the Residual Income model are determined by

using the variables just mentioned. After using this model in order to find the

present value of the residual income, the perpetuity, and the previously

mentioned beginning book value of equity we find the intrinsic value of

Campbell’s Soup Company which we can compare to the market value of the

company.

Once the intrinsic value was determined it was important to run a

sensitivity analysis in order to see what small changes in the growth rate and

cost of equity would do to the final intrinsic value. After running the sensitivity

analysis we find that the cost of equity and growth rate has a great impact on

the overall value. It is also important to note that there is alternate cost of

equity and growth rate combination that gives almost the same results as the

determined intrinsic value and the market value. This number is highlighted in

green on the sensitivity analysis.

What this tells us is that the market value of Campbell’s soup company is

correct. The intrinsic value computed was $37.49 and the actual market value

as of November 1, 2006 was $37.25. Based on the fact that Campbell’s stock is

correctly valued at this time would indicate that a present shareholder would

want to hold their stock. This would also indicate that this stock would be rated

neutral at this time. It is not time to sell or buy Campbell’s stock at this current

market price.

Long Run Average Residual Income Perpetuity

The long run residual income valuation method basically is a perpetuity

derived from the residual income method. The formula is:

P= BVE + BVE((ROE-Ke)/(Ke-g)

42

We simply plug our values into this formula to arrive at our valuation. We used

$4.34 as the book value of equity, the return on equity was equal to 24%, cost

of capital was 6.01%, and the growth rate was 1.2%. This numbers yield a

valuation of $20.57 which implies Campbell’s to be over-valued in the market.

These statistics are consistent with the other valuation models we have used.

The long run residual income model only takes two estimates into consideration,

the cost of equity and growth. This should make the long run residual income

model one of the more accurate we have used.

Sensitivity Analysis

g 0 0.012 0.04 0.08 0.1

0.02 $52.76 $125.38 N/A N/A N/A

0.04 $26.38 $35.82 N/A N/A N/A

Ke 0.0601 $17.56 $20.85 $43.86 N/A N/A

0.07 $15.07 $17.29 $29.38 N/A N/A

0.08 13.19 14.75 22.04 N/A N/A

Our results can be seen on the sensitivity analysis. You can see here that

a lower cost of equity yields the closest result to the market value. This may

suggest that the market is expecting higher growth than our forecasts project.

Discount Dividends Valuation

The discount dividends valuation uses the forecasted dividends of a firm

and the cost of equity to provide a measure of the intrinsic value. Campbell’s

dividends average $.71 over the past five years which is a relatively low

dividend. This being the case, we decided to keep our dividend right at $.71 with

no growth. We used the Ke that was found earlier. With these numbers, we

found Campbell’s per share value at $11.83, which is drastically lower than the

43

market value. One explanation for this low estimate is that Campbell’s pays a

small dividend which traditionally has not grown exponentially. This being the

case, we feel that the discount dividends model is not the appropriate model to

value Campbell’s. The sensitivity analysis shows that the Ke would have to drop

to .02 to be close to the market value.

Sensitivity Analysis g

Ke 0 0.05 0.1 0.15 0.02 $37.27 N/A N/A $1.23 0.04 $17.78 N/A N/A $0.75

0.0601 $11.83 $46.47 N/A $0.16 0.07 $10.16 $23.97 N/A N/A 0.08 $8.89 $16.30 N/A N/A 0.09 $7.90 $12.45 N/A N/A

Abnormal Earnings Growth We used the abnormal earnings growth model to show the re-investment

of dividends. The first step we took was to use the forecasted values of earnings

per share and dividends per share for the next ten years. We then multiplied the

previous year’s dividends per share by our cost of equity to get the value of

reinvesting the dividends (DRIP). To get the cumulative dividend earnings we

added DRIP plus the earnings per share. To get normal earnings, we took the

previous years earnings per share and multiplied it by one plus the cost of

equity. Next, we subtracted the normal earnings from the cumulative dividend

earnings to find the abnormal earnings growth rate. We then did the

calculations to forecast out the abnormal earnings for the next nine years. We

then discounted all of the values back to get the total present value of the

abnormal earnings growth. We did this by taking the sum off all the total

44

present values. We estimated that there would be no growth after 2016. Then

to find the total average earnings per share perpetuity we added the core

earnings per share, total value of abnormal earnings growth, and the present

value of the terminal value (estimated to be zero). Then to find the estimated

price per share of 32.22, we divided the total average EPS perpetuity of 1.94 by

the capitalization rate of .0601. We feel this valuation is fairly accurate with the

other valuation models.

Sensitivity Analysis g 0 0.05 0.1 0.15

0.04 $54.62 $54.62 $54.62 $54.62

0.05 $41.44 N/A $41.11 $41.44

0.0601 $32.22 $32.22 $32.22 $32.22

0.07 $26.14 $45.56 N/A $11.57

0.08 $21.64 $21.64 $21.64 $21.64

0.09 $18.23 $18.23 $18.23 $18.23

By performing the sensitivity analysis, the valuation is somewhat sensitive

to a change in the cost of equity. The lower the cost of equity, the higher the

share price is. Since terminal value is at zero, there will be no change in the

growth rate.

45

The Value of Campbell’s

After considering all the intrinsic valuation models we came to the

conclusion that Campbell’s soup company is currently over-valued. This is based

on the fact that all but one of the intrinsic values was lower than the market

value. The only one not lower was the residual income model. This particular

model was relatively the same as the current stock price.

When considering which valuation to choose we felt that it was important

to choose the residual income or the AEG as our selected model for intrinsic

value. The reasoning for this is that their predictability power is hands down

higher than the free cash flows or the discounted dividends models. While

residual income does have the greatest predictability power we felt that after

carefully analyzing each individual result the AEG model in this instance is more

accurate. It has been established that earnings and dividends paid out can be

linked together. Dividends paid out also helps us to determine the beginning

book value of equity for the next year. These things holding true makes the AEG

model a reliable source to determine the actual value of the firm.

We feel that our conservative forecast of earnings as well as our estimate

of cost of equity has made the intrinsic value established for Campbell’s by the

AEG method the most reliable estimate of the actual price of Campbell’s Soup

Company. Campbell’s current stock price is $37.27. Our analysis of this

company has determined we feel the actual value is closer to $32.22 determined

by the abnormal earnings growth model.

46

Appendix A Financial Ratios

47

Forecasted Financials Balance Sheet

48

II Pro Forma Balance Sheet

49

III Income Statement

50

IV Pro Forma Income Statement

51

V Cash Flow Statement

52

VI Financial Ratios

53

Appendix B WACC

54

WACC-Data

55

WACC Regression 3-Month

56

WACC Regression 1-Year

57

WACC Regression 5-Year

58

WACC Regression 10-Year

59

Senior Notes Payable

60

Appendix C – Valuation Models Discounted Dividends

61

Free Cash Flows

62

Residual Income

63

Long Residual Income

64

Abnormal Earnings Growth

65

Sources

Campbell’s:

Campbell’s Soup Co……….www.campbellsoupcompany.com

Edgarscan (CPB Filings)…

http://edgarscan.pwcglobal.com/servlets/getCompanyDetail?Name=CAMPBELL+SOUP+

CO

Finance:

Yahoo…………………………http://finance.yahoo.com/q?s=cpb

Google………………………..http://finance.google.com/finance?q=CPB

Forbes………………………..http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.

jsp?tkr=CPB

Federal Reserve Rate….. http://research.stlouisfed.org/fred2/categories/22