H. J. Heinz: Decent Operating Performance Attracts Yield-Seeking Investors

| About: The Kraft (KHC)

Shares of H. J. Heinz Company (HNZ) ended the week roughly flat. On Wednesday, the food manufacturer announced its first-quarter results.

First Quarter Results

H.J. Heinz reported first-quarter revenues for its fiscal 2013 of $2.79 billion, down 1.5% on the year. Sales were negatively impacted as a result of a strong dollar, which impacted sales by 5.6%. Net prices rose by 2.3% and volume growth by 2.5%. On average, analysts expected Heinz to generate revenues of $2.84 billion.

Net income from continuing operations rose by 23% to $279 million. Reported diluted earnings per share rose 24.3% to $0.87, compared to $0.70 last year. A strong dollar had a negative impact of $0.04 per share. Analysts expected Heinz to earn $0.80 per share.

CEO and Chairman William Johnson commented on the results:

"Heinz delivered strong results and our 29th consecutive quarter of organic sales growth, despite the difficult economic environment, higher commodity costs and headwinds from foreign currency. Heinz is off to a good start in Fiscal 2013, led by our trio of growth engines - Emerging Markets, Global Ketchup and our Top 15 brands."

Heinz is well known for some major brands, including Quero, Master, Golden Circle, ABC, Weight Watchers, Smart Ones, Heinz and Ore-Ida.

Segmental Information

North America

Revenues in the North American division fell 2.0% to $759 million, while organic sales increased by 0.9%. Pricing increased 1.0%, while volume was flat. New product innovations contributed to growth, offset by the decision to exit T.G.I. Friday's frozen meals. Operating income fell by 3.9% to $183 million.


Sales in Europe fell 7.2% to $778 million, driven by a negative 8.8% impact of a strong US dollar. Organic sales increased by 2.0% in a difficult environment. Net pricing increased by 2.9%, while volumes fell by 0.9% in weak economies in Continental Europe and Italy. Operating income came in flat at $137 million, increasing 8.0% on a constant currency basis.


Sales fell by 1.9% to $658 million, driven by a 6.1% unfavorable impact from a strong US dollar. Organic sales rose 4.1%, driven by a 1.4% increase in pricing and 2.7% increase in volumes. Operating income rose 19% to $73 million, and is up almost 30% on a constant currency basis.

Rest of World

Sales in the rest of the world rose 16.5% to $281 million. Sales growth is impressive, given the unfavorable foreign exchange translation of 15.1%. Organic sales increased by 31.7%, driven by improved pricing of 6.8% and a 24.9% volume increase. Growth was driven by the Brazilian operations. Operating income rose 4.0% to $31 million, increasing 3% on a constant currency basis.


For the full year of its fiscal 2013, Heinz anticipates organic sales growth of at least 4.0%. Heinz anticipates constant currency earnings per share growth of 5-8%, on a continuing operating basis.

Heinz did not provide a full year revenue or earnings outlook. Analysts expect Heinz to generate annual revenues of $11.8 billion, while earnings per share are estimated to come in at $3.52.


Heinz ended its first quarter with $979 million in cash and equivalents. The company operates with $5.0 billion in short- and long-term debt, for a net debt position of over $4.0 billion. For its full year of 2012, the company generated revenues of $11.6 billion. The company net earned $923 million, or $2.85 per diluted share.

The market currently values H.J. Heinz at $18 billion. This values the firm at 1.5 times annual revenues and 20 times annual earnings. The valuation compares to a revenue multiple of 1.3 times for Kraft Foods Inc. (KFT) and 1.4 times for Campbell Soup Company (CPB). These competitors trade at 20 and 15 times trailing annual earnings, respectively.

Heinz pays a quarterly dividend of $0.51 per share, for an annual dividend yield of 3.7%.

Investment Thesis

Year to date, shares of H.J. Heinz trade with modest gains of 3%. Shares traded in a tight range of $52-$58 so far this year.

Over the past five years, shares have advanced roughly 25%. Shares fell to lows of $33 in the beginning of 2009, and continuously advanced to levels around $56 at the moment. Heinz grew its annual revenues from $10.0 billion in 2009, to $11.7 billion in 2012. Net earnings remained largely unchanged, a little over $900 million, or close to $3 per share. Annual dividends increased from $1.66 to $1.92 per share.

Heinz is a relatively safe investment for long-term investors. Investors should not expect spectacular returns in the short term. However, reinvesting dividends over the long term provides investors with decent returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.