There's More Than Ketchup For Heinz And Its Shareholders

May.31.12 | About: The Kraft (KHC)

"To do a common thing uncommonly well brings success." - Henry John Heinz, founder of Heinz

Since 1869, Heinz (HNZ) has been making ketchup for people around the world. The company holds the number one market share position in ketchup and through acquisitions has grown to market leading positions in several other categories. Last week, the large food company reported earnings for its fourth quarter.

For the fourth quarter of fiscal 2012, Heinz saw total sales grow over 5% to $3.05 billion. Net income grew 16.8% from the prior year to $261 million. Excluding special items, earnings per share were $0.81, which represented growth of 17%. The earnings per share increase also marked 28 straight quarters of organic sales growth for Heinz. Quero, the Brazilian company acquired recently by Heinz, increased sales by 3.1% during the company's fourth quarter. Free cash flow for the quarter was $608 million.

Sales totaled $11.6 billion for fiscal 2012, setting a record for the company. The increase of 8.8% across total sales was led by the emerging markets sector seeing organic growth of 16.4%. The emerging markets sector accounted for 21% of Heinz's total sales during fiscal 2012. Earnings per share for Heinz's fiscal 2012 were $3.35. On a diluted basis, earnings per share were reported as $2.85. Free cash flow exceeded $1 billion once again and came in at $1.08 after special charges.

One of Heinz's strengths is its key international brands. The company recognizes its largest brands as its "Top 15 Brands" which are made up of: ABC, Classico, Complan, Golden Circle, Heinz, Honig, Master, Ore Ida, Plasmon, Pudliszki, Quero, Smart Ones, TGI Friday's, Wattie's, and Weight Watchers.

The company's main goals are to raise sales across three sectors: Top 15 brands, emerging markets, and global ketchup. The Heinz ketchup brand commands over 50% of the ketchup market in the United States. The company's Ore-Ida potato brand also controls over 50% of the frozen potato market.

In the ketchup market, Heinz main competitor is Hunt's, a product from ConAgra Foods (NYSE:CAG). Ketchup and Sauces accounted for 45% of Heinz's net sales in fiscal 2012. Heinz dominates the ketchup market in the United States and also holds a #1 market share in 7 of the top 10 ketchup markets, including the United States, Russia, Germany, the United Kingdom, Venezuela, Canada, and Poland

Two of the three countries where Heinz is not number one are Brazil and Mexico. The company is actively investing money in those markets to attempt to become the market leader. Heinz is building a production facility in Brazil that should lead to this position within a couple of years.

Heinz has a growing international presence. The company has focused on emerging markets and considers the focus on these growing economic regions as one of their top three priorities for the year. With annual sales of $42 billion in emerging markets in 2011, Heinz is forecasting to almost double that amount to $80 billion in 2018. The sales of $80 billion by 2018 would actually pass the projected $78 billion of developed market net sales for the first time.

One of Heinz's key plans is using its "Buy and Build" approach to gain entry into international markets. The company buys small food companies in international markets with sales of $250 million and attempts to turn them into $500 million or $1 billion food brands or companies. Recent acquisitions by Heinz have allowed the company to increase sales of the acquired brand through proper management, while also allowing Heinz to bring some of its own products into the country. After the Quero acquisition in Brazil, sales of imported Heinz ketchup doubled in the nine months after the acquisition.

Heinz's infant/nutrition brands are particularly strong in international markets. Emerging markets made up 40% of the segments sales in fiscal 2012. The segment saw sales of $1.2 billion in the last fiscal year. Heinz was in the running for Pfizer's (NYSE:PFE) infant food business, but eventually dropped out. Heinz is starting to aggressively attack this area of focus with plans to be a leader in the infant nutrition business in emerging markets. Heinz ranks number three in prepared baby food globally behind Nestle and Danone.

Another area Heinz is focusing on is US Foodservice. Although Heinz is already strong with restaurant sales, it is introducing new products like soups, and other sauces to diversify itself away from sales of ketchup to restaurants. The company maintains strong relationships with McDonald's (NYSE:MCD), Subway, Wendy's (NASDAQ:WEN), Burger King, and Yum Brands (NYSE:YUM). Heinz will begin to expand its foodservice into other regions like Asia, Africa, and the Middle East.

Heinz shares yield over 3.5% on an annual basis. The company recently raised its dividend payout amount, marking the ninth straight year of a rise in the quarterly amount. The 7.3% raise brings the quarterly payout to $0.515 per share.

After the company's earnings, two large firms downgraded shares of the global food company. JPMorgan (NYSE:JPM) downgraded Heinz shares to 'Hold', while Jefferies downgraded the stock to a 'Neutral' rating.

Heinz has beat analysts' estimated earnings per share each of the last four quarters. Over that time, the earnings surprises have been 3%, 1%, 11%, and 3%, respectively. For the current fiscal 2013, analysts see Heinz earning $3.55 per share. The following year, analysts see Heinz earning $3.81 per share (estimates taken from Yahoo Finance).

Company guidance for 2013 includes:

  • Organic sales growth of 4% or more.
  • Earnings per share growth of 5-8%.
  • Emerging markets segment to make up 25% of total sales.
  • Expects free cash flow of $1.1 billion.

Heinz was one of the first food companies to recognize the importance of expanding into emerging markets. The company has taken its own products to new regions and also focused on acquiring existing strong brands. The "Buy and Build" approach has paid off for the company and will continue to lead the company into the future. The company is trading close to a 52-week high and appears to be trading high on a price to earnings valuation. However, with a yield north of 3.5% and expansion across the company's brands and growth initiatives, I have to recommend the shares for the long term. I see shares hitting $60 by the end of 2013.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HNZ over the next 72 hours.