Heinz (HNZ) Posts Strong and Steady Growth from Emerging Markets
Last Friday, food products giant H.J. Heinz (HNZ: Charts, News) posted strong third quarter earnings that topped Wall Street estimates. Heinz posted GAAP-adjusted earnings of 88 cents per share, a 4.8% improvement over the prior year quarter's 84 cents, which beat the average consensus by three cents.
In addition to its flagship ketchup brand, Heinz produces a wide variety of condiments, sauces, frozen food, soups, pasta meals, infant nutrition and other food products. Heinz sells these products to everyday consumers as well as large scale food service providers. The company has a large global footprint, operating in five main business segments - North American Consumer Products, U.S. Food Service, Europe, Asia/Pacific, and Other International Markets ("Rest of the World"). In November 2010, Heinz increased its reach into China with the purchase of Foodstar, a local food company best known for its bean curd and soy sauces. In April 2011, the company expanded into Brazil by purchasing an 80% stake in Coniexpress, a local producer of ketchup and condiments.
Heinz's third quarter results were notably strong in its "Rest of the World" segment, which increased its revenue by 112.4% to $242 million. Its Quero tomato sauce and ketchup brand, part of its Coniexpress acquisition, boosted sales by 86.6% in Latin America. To offset rampant Latin American inflation, which sunk many companies invested in the area, Heinz raised costs across the region, which increased its top line by 20.1% without adversely impacting sales. Volume on average for the segment increased 10.1% due to strong sales in Heinz ketchup and sauces in Latin America and other food products throughout the Middle East. However, a strong dollar impacted the bottom line, decreasing sales by 4.4%.
Heinz has slowly but steadily grown its top line for 27 straight quarters. The company's gradual, deliberate expansion into Latin America and Asia keeps it well-poised to capitalize on the growth of emerging markets, which should offset future slowdown in North America and Europe. These new markets are expected to increase the company's revenue substantially in the next few years. Kraft (KFT: Charts, News), Kellogg (K: Charts, News) and Unilever (UN: Charts, News) have also adopted similar strategies to increase their exposure to these emerging markets.
Heinz is also balancing its budget carefully. The company will shut down as many as eight production facilities and lay off 1,000 workers in the coming year to cut costs. CEO William Johnson stressed the importance of cutting costs and streamlining the company's supply chain, stating, "Heinz has been focused this year on reducing fixed costs by increasing manufacturing efficiency, reducing overcapacity and streamlining our operations." Johnson also emphasized the development of Project Keystone, the company's first centralized European supply chain hub, which should improve the company's efficiency in the troubled region.
In addition to top and bottom line growth, Heinz offers a solid dividend yield of 3.7% for patient investors. The company increased its dividend by 14% over the past two years. Shares currently trade at 15.1 times forward earnings with a 5-year PEG ratio of 2.08. Although this means that there may not be explosive growth on the horizon, the company is a safe, stable bet for uncertain times.
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