H.J. Heinz: Earnings Preview

| About: The Kraft (KHC)
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H.J. Heinz Company (HNZ) is scheduled to report its third-quarter 2012 financial results on February 17, 2012. The current Zacks Consensus Estimate for the quarter is 85 cents per share.

Second-Quarter 2012 Synopsis

Heinz posted better-than-expected second-quarter 2012 adjusted earnings of 81 cents per share, exceeding the Zacks Consensus Estimate by a penny. The earnings also surpassed the prior-year earnings of 78 cents by 3.8%.

About 3 cents of the increase in earnings were driven by enhanced sales, lower taxes and favorable foreign exchange rates. Robust sales growth was fueled by developing markets that were backed by acquisitions and strong global performance of Ketchup. Heinz’s Top 15 brands also grew organically in the quarter, contributing to the growth.

During the quarter, total sales climbed up 8.3% to $2.83 billion in the second quarter, led by a 15.8% organic sales growth in emerging markets. Further, acquisitions of the Quero brand in Brazil and the Foodstar operations in China fuelled sales growth by 5.0%. However, total sales lagged the Zacks Consensus Estimate of $2.93 billion.

Heinz also affirmed its full-year 2012 earnings expectation to grow in the range of 6% - 8% within $3.24 to $3.32, excluding the impact of productivity initiatives but including the incremental investment in Keystone. Heinz also expected its sales to grow in the range of 7%-8% for 2012.

Agreement with Analysts

Analysts have projected weak growth from the company over the next two years, though Heinz had posted better-than-expected second-quarter results, as we don’t see any significant positive movement in analyst estimates for the current quarter or both the fiscal years over the past 30 days. With a downside trend in the estimates, we justify a negative sentiment on the stock.

One out of the ten analysts increased his estimates for the third-quarter of 2012, whereas two of them reduced their estimates over the past 30 days.

For the fiscal year 2012, five out of the thirteen analysts predicted a downside in the estimates, while four out of the fifteen lowered their estimates for the fiscal year 2013. However, none of the analysts moved up their estimates for both the fiscal years.

The downside trend points to the fact that there was no major catalyst during the quarter that could drive results.

Magnitude of Estimate Revisions

The estimates for the upcoming quarter moved down by a penny to 85 cents per share in the past 30 days. Likewise, the estimates for both the fiscal 2012 and 2013 declined by one cent each and came down to $3.32 and $3.60 per share, respectively.

Earnings Surprise

With respect to earnings surprises, Heinz has topped the Zacks Consensus Estimate in three of the last four quarters, while it declined in one of the quarters. Over the last four quarters, the earnings surprise ranged from a negative 1.39% to a positive of 3.70%, with the average earnings surprise being 1.55%, suggesting that Heinz has outperformed the Zacks Consensus Estimate.

H.J. Heinz, which competes with Sara Lee Corp. (SLE) and Campbell Soup Company (NYSE:CPB), primarily markets ketchup, condiments & sauces, frozen food, soup, beans, meals & snacks, and infant foods. Heinz’s major brands are Heinz Ketchup, Ore-Ida frozen potatoes, Weight Watchers Smart Ones frozen dinners, Classico sauces, Jack Daniels barbeque sauces and ABC Indonesian sauces.

Heinz has a solid balance sheet and strong free cash flow, which the company uses to pay off its shareholders through regular dividend payments.

However, intense competition from other established players and commodity inflation undermine the company’s future growth prospects and profitability. Consequently, we have a Neutral rating on the stock. Heinz holds a Zacks #4 Rank, which translates into a short-term Sell recommendation.

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