Heinz: Looking Toward Its Future

May.25.12 | About: The Kraft (KHC)

On Thursday, Heinz (HNZ) reported its fourth-quarter earnings results along with its full year outlook. The earnings came in right around where Wall Street analysis were expecting them to. The company had to scale back its long-term growth projections due to an increasingly difficult economic climate, especially in developing markets. This is a recap of HNZ FY2012:

  • Sales grew 8.8% to a record $11.6 billion, fueled by growth in Emerging Markets, Top 15 Brands and Global Ketchup
  • Emerging Markets generated strong double-digit organic sales growth, up 16.4% (40.9% reported), and a record 21% of the Company's total sales
  • Global Ketchup delivered organic sales growth of 8.0% (9.7% reported)
  • Top 15 Brands delivered 5.0% organic sales growth (12.3% reported)
  • EPS grew 9.5% to $3.35, excluding special charges ($2.85 reported)
  • Reported net income was $923 million; Net income before special charges was $1.09 billion
  • The Company generated strong operating free cash flow (OFCF) of $1.08 billion. Excluding special charges, OFCF was $1.21 billion

These results indicate that the company is delivering strong growth in emerging markets along with its new product line comprised of organics. Though the company decreased its long-term growth prospects from 7-10% per year in earnings growth to 6-9%, this is in large part because the company is investing $120 million in FY2013 alone to drive incremental sales throughout its banners. HNZ is a company that has and continues to value long-term success, rather than putting short-term earnings at the epicenter of its priorities. For investors looking for a strong dividend (3.60% currently) and a company that has a clear strategic vision for driving revenue and profit, HNZ is a strong buy now and into the future.

(Yahoo Finance)

Fundamentals:

As stated in an article written a quarter ago, entitled: Heinz: Poised For Profitability and Stability, little has changed in regards to the fundamental stability of HNZ. What has been realized is that emerging markets are more difficult than previously expected for growth and stability. HNZ putting forth $120 million in order to augment growth is an investment in the company's future. The company has proven to be nimble in navigating the economy as it has introduced smaller portioned products like $.99 ketchup pouches, and this illustrates that HNZ is committed to staying current and investing in its future. The graphic below illustrates the type of thinking and strategic planning HNZ has to tackle emerging markets, organics, and other growth opportunities.

(Heinz Full-Year Report)

Dividend:

At the end of the fiscal year, HNZ raised its cash dividend to $2.06, a 7.3% increase year over year. This marks the ninth consecutive year of dividend growth and is tangible evidence that the company wants to both invest in the future and return solid dividend/cash payments to investors.

(Heinz Full-Year Report)

Valuation:

The valuation of HNZ, marked by its comparison valuation to two of its strongest peers in manufacturing, General Mills (NYSE:GIS) and Campbell Soup Company (NYSE:CPB), mark its strength to investors as being inline with its peer group and having the lowest PEG ratio due to its proven strategy abroad.

Forward Price/Earnings:

  • HNZ: 13.38
  • CPB: 13.10
  • GIS: 14.13

PEG Ratio:

  • HNZ: 1.78
  • CPB: 4.34
  • GIS: 2.12

EV/EBIDA:

  • HNZ:10.71
  • CPB: 8.31
  • GIS: 10.52

Conclusion: For the aforementioned reasons, HNZ is in a position to prosper and continue to drive incremental revenue and profitability into 2013 and beyond.

(All financial metrics referenced above are obtained from Yahoo Finance, CNBC Analytics, S&P Capital IQ and Thomas Reuters.)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.