Campbell and Heinz Analysis
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The Canned, Frozen & Preserved Fruit, Vegetable & Food Specialties Industry (SIC Code 2030) consists of companies engaged in the business of canning fruits, vegetables, and juices. Companies that manufacture and produce ketchup and sauces as well as preserves, jams and jellies are also included in this industry. Both H. J. Heinz and Campbell Soup Companies are leaders within the industry. H. J. Heinz Company (Heinz) was incorporated in Pennsylvania on July 27, 1900. The company and its subsidiaries manufacture and market an extensive line of food products throughout the world. Heinz is best known for its ketchup, condiments, and sauces and operates 71 food processing factories as well as other facilities spanning 200 countries.
Campbell Soup Company is a global manufacturer and marketer of high-quality, branded convenience food products. Campbell Soup was incorporated under the laws of New Jersey on November 23, 1922. Campbell Soup, best known for its soups, sauces, and beverages, manufactures and sells its products in 120 countries. Pepperidge Farm, a Campbell Soup division, produces and markets fresh bakery products and frozen foods. More than 3,500 distributors across the United States and 60 other countries carry the Pepperidge Farm brand. Campbell Soup??™s international division offers more than 20 brands in the Asia Pacific region, greater Europe and Latin America.
According to SEC guidelines, companies that are considered large accelerated filers, such as Heinz and Campbell Soup, are required to file their 10-K within 60 days of their fiscal year end. This analysis is based on 2009 10-K filings. Both Heinz and Campbell Soup were in compliance with the SEC guidelines. Heinz??™s fiscal year ended on April 29, 2009. The company??™s 10-K form was filed on June 17, 2009. Campbell Soup??™s fiscal year ended on August 2, 2009. The company??™s 10-K form was filed on September 30, 2009.
In 2009, the Canned, Frozen & Preserved Fruit, Vegetable & Food Specialties Industry earned an average return on equity (ROE) of 23.9% (Exhibit 1). Campbell Soup??™s ROE equaled 101.1% and Heinz??™s ROE was 75.7%. Both of these companies are exceeding the industry average, which is an indication that they are financially sound. Both firms have more access to debt financing than the smaller firms in the industry and consequently can leverage their assets to achieve a greater ROE.
Heinz??™s 10-K reported that 85% of its revenue was generated from the categories of ???ketchup & sauces??? and ???meals & snacks.??? Earning total sales revenue of approximately $10 billion, it is the market leader in more than 50 countries. Campbell Soup has a strong and dominant position in the global soup market. The U.S. soups, sauces and beverages category contributed to 50% of the company??™s sales. Campbell Soup earned total sales revenue of approximately $7.5 billion. The industry earned total sales revenue of $20.6 billion. Together Campbell Soup and Heinz accounted for 85% of those total sales. The dominance these two companies have on industry sales is due to global brand recognition and continued strategic growth.
In addition to revenue, both Campbell Soup and Heinz are leaders in the industry in terms of total assets. Campbell Soup??™s 10-K reports a total of $6.1 billion in assets; additionally Heinz??™s 10-K reports a total of $9.7 billion in assets. Although these two companies had the highest total assets in the industry, their asset turnover ratios are below the industry average of 1.72. Campbell Soup has an asset turnover ratio of 1.25, indicating that for every dollar of its assets it generates $1.25 of sales revenue. Heinz has an asset turnover ratio of 1.05, indicating that for every dollar of its assets it generates a $1.05. Although Heinz is less efficient in asset turnover than Campbell Soup, both of their 10-Ks indicate that approximately 30% of their total assets are goodwill. Assuming that the other firms in the industry are unable to finance growth through acquisitions, the goodwill represented on their books would be substantially less than both Campbell Soup and Heinz. It can also be assumed that increases in sales revenue from acquisitions are not realized in the short term. The result of not realizing the increased revenues would cause the relative performance in asset turnover to be lower than the industry as a whole.
All of the companies in the Canned, Frozen & Preserved Fruit, Vegetable & Food Specialties Industry earned a net profit in 2009. The industry??™s net profit totaled $1.9 billion. Campbell Soup??™s and Heinz??™s net profits accounted for 89% of the industry??™s total. In addition, both Campbell Soup??™s and Heinz??™s net profit was approximately 10% of their sales revenue. The average profitability for the industry is 8.80%. Although larger firms should expect economies of scale and higher profits, Campbell Soup and Heinz are only showing a 1% improvement of profitability over the industry. This margin of profitability implies that the two firms are not enjoying significant economies of scale.
Campbell Soup??™s 10-K indicates that the company accumulated a total long-term debt of approximately $2.2 billion which represented 42.1% of the company??™s total liabilities. The long-term debt consisted of note payables and debentures. Heinz also had a significant amount of long-term debt totaling $5.1 billion which was 79.5% of its total liabilities. Heinz??™s long-term debt was comprised of commercial paper, preferred stock, notes payable, marketable securities, and credit agreements in foreign currencies. Both Campbell Soup and Heinz have a higher leverage ratio than the industry with 8.32 and 7.92 respectively. The remaining companies in the industry, which are relatively smaller in terms of sales revenue, had financial leverage ratios ranging from 1.07 to 2.34.
Campbell Soup and Heinz have similar revenue recognition policies as indicated in their individual 10-Ks. Both companies recognize revenue once a product ownership, title, and risk of loss is transferred to their customer. However, Heinz??™s 10-K notes that customers do not have the right to return products unless damaged or defective. Heinz also notes that shipping and handling charges billed to the customer are also booked as revenue. In addition, Campbell Soup recorded sales revenues do not recognize returns, discounts, and allowances. Certain sales promotion expenses are classified as a reduction of sales. In order to determine the cost of their inventory, both Campbell Soup and Heinz use the average cost method.
The average accounts receivable turnover of the industry is 12 with a collection period of 34 days. Campbell Soup ranked second in the industry with an accounts receivable turnover of 13.8 and a 27 day collection period. Heinz performed less efficiently with an accounts receivable turnover of 8.7 and a 42 day collection period. The industry manages to collect its accounts receivable on an average of once a month.
The inventory turnover for both Campbell Soup and Heinz were below the industry average with 5.51 and 5.02 respectively. The Canned, Frozen & Preserved Fruit, Vegetable & Food Specialties Industry averaged a 9.04 inventory turnover. Campbell Soup??™s 10-K indicates that its cost of goods sold (COGS) are incurred by ingredients and other manufacturing costs. Ingredients are purchased from various suppliers, and raw materials are subject to fluctuations in price. Those fluctuations in price are due to seasonal changes. Campbell Soup is also exposed to foreign exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries. Since both Campbell Soup and Heinz are larger organizations, they could hold higher levels of inventory than smaller firms to take advantage of pricing economies. This strategy would have the effect of increasing the average value of inventory and decrease the inventory turnover ratio compared to the industry.
Heinz??™s 10-K indicated that its gross profit suffered a 2.6% decrease, resulting in a total gross profit of $3.58 billion. The decrease in gross profit is a result of higher prices and acquisitions. The company also incurred increased costs due to foreign exchange rates and higher commodity costs. In addition, Heinz??™s gross profit margin decreased to 35.3% from 36.5% in 2008 as pricing and productivity improvements were offset by increased commodity costs. In conclusion, both Campbell Soup Company and H. J. Heinz Company have demonstrated that they are leaders in the Canned, Frozen & Preserved Fruit, Vegetable & Food Specialties Industry