5.4 Risk Analysis
5.4.2 Credit analysis
71 appears to be an intentional strategy. The long-term liquidity analysis is based on book- and market values and has yielded opposite results. Where book values indicate a high long-term liquidity risk compared to peers, market values show Campbell holding the least risk associated with its long-term obligations. With Campbell being a publicly traded company, and has been so for many years, it is the authors view that market values are closer to the realizable value and hence depict a more accurate picture (Petersen & Plenborg, 2012, p. 158). The liquidity position is therefore viewed as strong in the short term and moderate in the short term. One should also note that Campbell does hold a revolver facility of $2 billion, which enables them to operate with a higher risk in the short-term as they can utilize the revolver facility in the event of unforeseen economic changes to the short-short-term environment.
Financial Analysis
72 Credit Rating
2010 2011 2012 2013 2014 2015 H1 2016
EBITDA Coverage Ratio 14.3 12.1 12.4 11.0 12.3 12.9 15.5
EBIT Coverage Ratio 12.0 9.9 10.1 8.0 9.8 10.1 12.8
Funds from Operation / Total Debt 0.21 0.18 0.18 0.12 0.17 0.15 Free Operating Cash Flow / Total Liabilities 0.23 0.21 0.20 0.17 0.18 0.17
ROIC (%) 21.2 19.2 17.7 17.4 13.3 12.8
Gross Margin (%) 43.4 44.3 44.2 42.8 41.2 38.7 38.5
Long-term Debt / Total Capital 0.29 0.23 0.29 0.26 0.22 0.21 0.21 Total Liabilities / Total Capital 0.32 0.36 0.34 0.34 0.32 0.30 0.26
EBITDA Coverage Ratio AA AA AA AA AA AA AA
EBIT Coverage Ratio A A A BBB A A A
Funds from Operation / Total Debt BB B B B B B
Free operating Cash Flow / Total Liabilities A A A A A A
ROIC A BBB BBB BBB BB BB
Gross Margin AA
A AA A AA
A AA A AA
A AA
A AAA
Long-term Debt / Total Capital A AA A AA AA AA AA
Total Liabilities / Total Capital AA AA AA AA AA AA AA
Average Rating A A A A A A AA
Source: Authors own compilation based on ratings and ratios from (Standard & Poor's, 2013)
73 Summary of strategic- and financial- analysis
Strengths Weaknesses Opportunities Threats Economic
Outlook Macroeconomic
Political &
Legal Highly adapted
to GMO and additives regulations
Chinese policies regarding import of consumer goods are set to gradually become more lenient.
New regulations picking up speed to a point where Campbell can no longer adapt fast enough
Positive (LT)
Economic Disposable income in emerging markets is growing rapidly.
Increasing consumer confidence in Australia and China.
Slow growth in disposable income for main markets.
The real effect of consumer spending expected to be flat in the U.S.
Increasing middle class in emerging markets.
Population growth in the U.S. and Australia
Long term volatility in currency market is affecting Campbell’s non-U.S. revenue
Positive (ST-MT)
Socio-cultural Holds a portfolio of relatively healthy brands
Healthy food products are growing at 7%
globally.
People are eating more out, and purchasing fully ready meals.
Neutral
Environmental
&
Technological
E-commerce can open up more direct sales channels.
Social media enables a rapid environment for testing new product ideas.
Increased requirements to sustainable production.
Neutral
Industry specific
Suppliers Large pool of potential suppliers gives Campbell a strong bargaining position.
In the long term, raw materials may become scarcer due to natural conditions and growing populations.
This would tilt the bargaining power.
Neutral (MT-LT)
SWOT
74 Retailers Strong brand
portfolio and high customer loyalty makes products a mainstay in retailer’s product mix.
Few retailers account for majority of sales and therefore hold a strong bargaining power.
Backward integration and a continuation of retailer’s private label products gaining market share.
Negative (MT-LT)
Market
positions U.S. market leader in Soup and Australian market leader in Biscuits and Soup.
Main markets see loss of market share due to value driven consumer choosing private label offerings.
New growth segments such as baby food and fresh food still to reach maturation.
Price
competition is fierce as it directly relates to shelf space and product turnover.
Positive/Neutral (ST-LT)
Company specific
Profitability Strong and stable profit margin in top quartile of peers
Stagnated sales growth, and sensitive to changes in profitability due to high degree of debt compared to peers
Higher pressure on margins from retailers, increasing prices on raw material
Neutral (ST-LT)
Liquidity risk Strong liquidity in the long term, and a solid revolver
Higher short term liquidity risk than its peers, but not alarming
Negotiate longer payment periods with suppliers
Negative/neutral (ST)
Positive (LT)
Innovation A proven track-records of innovations
Positive/Neutral (ST-LT) M&A
experience Balance sheet allows for M&A activity going forward
Lacks experience in post-acquisition integration
Strengthening of its brand portfolio within high-growth segments.
Scaling new acquisitions
Megadeals and M&A activity by others would decrease Campbell’s relative size and leave them with a diminished bargaining power with its retailers.
Positive/neutral (ST-LT)
Source: Authors own compilation
75
7 F ORECASTING
In order to perform a valuation of Campbell an estimation of future cash flows must be performed, which is done through modeling a budget. Prior to structuring the budget, one must first determine the length and level of detail of the budget period. There is a trade-off between the length of the budget and the degree of accuracy. Longer forecast periods tend to lose some of its substance and credibility, as detailed projections of cash flow far into the future are hard to predict. For mature companies, with short-term growth rates close to the long-run growth rate, the forecast horizon is typically shorter than for premature companies, which usually exhibit higher and more volatile growth rates. Campbell enjoys somewhat stable growth and margins, causing the historical profitability to likely serve as a stable proxy for future returns. The chosen forecast period spans from 2016 to 2025, but has been split into three parts. The first four years represent a comprehensive budgeting based on the strategic and financial analysis of Campbell, the last two years represent the terminal period, while the period in-between is a top level forecast where all items are converging towards their terminal period forecast.
Two-stage valuation models like the DCF and EVA model assume a constant growth in the terminal period. The terminal period should theoretically reflect a “steady-state”, at which the company is matured in terms of growth, and this growth should reflect the expected weighted average long-term growth of the markets at which Campbell’s operate. It is also important to remember that as the long-term growth continues into perpetuity (Gordon, 1962), a growth rate exceeding the economy as a whole would implicitly project that the company would continuously outgrow the market into eternity and eventually completely take over the whole market.
Moreover, the forecasting model is based on a sales-driven approach, as almost every line item is directly or indirectly influenced by changes in revenue. The authors believe this approach offers the best compromise between the degree of activity of the company and the related expenses and investments, such that, for example COGS will be expressed as a percentage of the expected level of activity, represented by total net sales (Koller, Goedhart, &
Wessels, Valuation, Measuring and managing the value of companies, 2010, pp. 188-189).
As described in the strategic analysis, there are several uncertainties regarding the future of the packaged food industry, and to account for this uncertainty, the authors conduct three different budget scenarios. The three cases represent different levels of possible revenue, and include a "Base", "Bull" and "Bear" case. The probability of each case determined on the basis of our individual perception, which is a "best guess" approach. These cases are meant as guidance, and to illustrate the fact that Campbell’s future earnings are sensitive to changes in the industry.