Trio Of Growth Engines Can Power Heinz And Your Portfolio Going Forward

Sep. 4.12 | About: The Kraft (KHC)

World ketchup leader Heinz (HNZ) reported first-quarter earnings (earnings call) last week. The company saw its 29th consecutive quarter of organic sales growth of at least 5%. Can this dominating food company continue its stellar growth? Time will of course tell, but with the company betting money on new emerging markets and strategic international acquisitions, I'm willing to bet yes. Heinz's new vision going forward is to focus on a "trio of growth engines." The trio consists of: emerging markets, global ketchup, and top 15 brands.

In the first quarter, Heinz saw net sales increase 4%. The company's operating income increased 5%. The company was led by strong results from emerging markets. Sales in the North American consumer category were up 3%. In North America, the company saw its volume share increase in 9 of 12 product categories. The United States Foodservice saw sales growth of 2.5%. In Europe, sales increased 2% mainly due to pricing as the continent sees a weak economic environment. The Asia/Pacific region was strong with soy sauce and strong results in China, India, and Indonesia, helping the segment increase sales by 4%. The Rest of World region saw sales increase 32%. Several key countries saw huge double digit sales increases including: Brazil, Mexico, and the Middle East.

Sales increases by business segment:

· Ketchup/Sauces: +6.0%

· Meals/Snacks: +3.1%

· Infant/Nutrition: +2.3%

Emerging market organic sales were up 20%. The strong international results were led by the recent acquisitions of Quero in Brazil and Foodstar in China. Along with the acquisitions, the company hit a milestone by holding the number one market position for both ketchup and condiments in the entire country of Russia. India and Indonesia saw strong sales growth as well. The company reported that emerging markets represented 26% of first quarter sales, a new company record.

The company's top 15 brands saw 6% organic sales growth in the first quarter. These brands now make up three-fourths of the company's sales. Ketchup and sauces remain Heinz's key brands as they make up over 50% of the company's sales. To focus on its new growth engines, the company has quit several business ventures. Recently, the company exited its Boston Market and TGI Friday's licensed frozen food products. The company also sold its US Foodservice desserts business. This sale had a negative impact of $0.07 for the fiscal year. New brands like Quero and Foodstar have become top 15 brands and key growth brands for the company going forward.

In the second quarter, the company expects organic sales growth of 4%. The company is also forecasting for earnings per share to increase 10% from the prior year. The company posted $0.81 in earnings per share during last year's second quarter. The new forecast of 10% growth would represent earnings per share of $0.89 for the second quarter. Analysts on Yahoo Finance are forecasting earnings of $0.87 for the second quarter from $2.86 billion in sales. For the fiscal year, the company is forecasting $3.52-$3.62 in earnings per share. Analysts see the company earning $3.52 for the fiscal year. The following fiscal year has analysts predicting earnings of $3.79 per share. Heinz own targets are well above analysts and the company appears ready to beat analysts next quarter and for the full year, both results could send shares to new highs.

Heinz continues to spend money heavily on marketing campaigns. The company is using its international acquisitions to create awareness for existing brands in new markets. This is one of the main contributing factors to regions like Asia/Pacific and Rest of World seeing such dramatic sales gains. Heinz is able to use its massive scale, distribution, and brands to enter new territories and dominate. The company has a number one or two market position in over fifty countries and doesn't appear to be stopping anytime soon.

Shares of Heinz are c losing in on a new 52-week high ($58.31), with shares trading at $55.72 currently. The shares are now trading at a price to earnings ratio of 15.8 times analysts expected $3.52 in earnings per share. If the company can hit the high end of guidance ($3.62), shares are more reasonably priced with a current price to earnings ratio of 15.4. The company seems destined to beat analysts' earnings targets for the year, which will send shares higher. Patient investors also get a rising dividend that currently sees an annual yield of 3.7%. Clearly it's time to add some ketchup to your portfolio. In my last focus article on Heinz, I predicted a price target of $60 by the end of 2013. I now see the company hitting $60 by the end of 2012 as it focuses on its three new growth engines. Look for another major international acquisition in the next few months.

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.