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.

On a non-GAAP basis the company earned 95 cents per share. Heinz's GAAP adjusted revenue of $2.92 billion, which was a 7.2% improvement over the $2.72 billion the prior year quarter, also beat the analysts' average expectation of $2.89 billion. However, gross margin decreased 140 basis points to 36.4% while operating margin dipped 50 basis points to 15.6%. Net margin also dropped 30 basis points to 9.8%. These declines were attributed to rising food costs and inflation in emerging markets.


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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.

Other News About HNZ
Heinz: Poised For Continued Growth And Stability
Is Heinz evolving into the next Kraft?
H.J. Heinz Beats Analyst Estimates on EPS
Heinz posts solid earnings on strong international numbers. Other Stocks in the News
Kellogg Sees Cereal Sales Driven By Price, Not Volume
Is Kellogg sacrificing margins to pump up sales volume?
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Published on Feb 23, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2016. Content published with author's permission.

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