Food giant Heinz (HNZ) reported decent first-quarter results on Aug. 29, despite global macroeconomic headwinds. The firm saw reported revenue decline 1.5% to $2.8 billion, which was approximately in line with consensus expectations. Profit from continuing operations was $0.87 per share, up 10% from a year ago and several pennies higher than consensus expectations. Even though profits grew more than expected, the firm reiterated its full-year earnings guidance of $3.52-$3.63 per share. Shares score a respectable 6 on the Valuentum Buying Index, which combines a rigorous discounted cash flow process and momentum indicators. The company is trading in our fair value estimate range.
Though reported growth looked tame, on an organic (currency-neutral) basis revenue increased 4.8%, which Heinz identified as its 29th consecutive quarter of revenue growth. Gross margins increased just 10 basis points year over year, as rising prices managed to barely offset higher input costs. The firm announced Tuesday at its annual shareholders' meeting that it intends to invest heavily in expanding its presence in emerging markets, which experienced an impressive 19% revenue growth during the second quarter. Needless to say, the company has a strong portfolio driven by its flagship ketchup, Quero, Ore-Ida and Weight Watchers (license) brands, which we expect to obtain premium pricing abroad. Further adoption of Western diets that are heavy on foods where ketchup is a complement should continue to propel worldwide brand growth.
Results in North America were also decent, as organic sales increased 0.9%. The firm exited a number of frozen-food businesses that were facing margin pressure and had lower pricing power. The U.S. retail business grew 1.9% organically, but we're even more positive on its U.S. food service business that grew 2.4% in the period, to $315 million. All gains were attributable to better pricing, resulting in operating income jumping nearly 13% during the quarter. We're big fans of this business in the long term, especially with Americans consistently eating more meals outside the home. Though we admit consumers are often looking for healthier options, we see no signs that burgers and fries are going away anytime soon.
Overall, we like the firm's pricing power and great brand name, as well as its strategy for emerging markets growth. The company's dividend doesn't score well on our Dividend Cushion, but we think Heinz operates a very stable, predictable business -- we wouldn't say the dividend is in jeopardy. Still, we've had a lot of success predicting substantial growth potential with our Dividend Cushion, and we think there are better dividend-growth firms than Heinz at this time.
If the firm's Valuentum Buying Index rating increases (due to a better valuation assessment) and its dividend coverage with cash flow improves, we may consider adding it to our Dividend Growth Newsletter portfolio.