H.J. Heinz (HNZ)
On Wednesday, H.J. Heinz Company (HNZ: Charts, News, Offers), which produces condiments, sauces, frozen foods, other pre-prepared processed foods and infant food, announced a 13% increase in earnings due to continued growth in emerging markets. Heinz beat the Wall Street consensus by 2 cents at 75 cents per share (240 million USD), up from 67 cents a share (212.6 million) the previous quarter. Gross revenue increased 1.6% to 2.48 billion and organic sales rose 3.6%. Its gross profit margin increased to 36.6% from 35.7% despite increasing commodity prices and currency fluctuations. All signs point to continual unhampered global growth, with a possible breakout into higher levels, which would not only make this a high-yielding dividend stock, but a growth stock as well. Can Heinz, which is best known for its flagship Heinz Ketchup, up the ante by intelligently expanding into emerging markets?
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Stock Analysis
Heinz Ketchup, which debuted 136 years ago in America, is the tomato sauce of choice in the US, Canada and the UK. It holds 60%, 70% and 78% of these markets, respectively. The company has a narrow focus, with the 15 top brands lead by Heinz Ketchup accounting for more than 70% of the company’s total sales. The company has spent much of the past decade restructuring its brands, eliminating less profitable lines and narrowing its sales focus. Currently, condiments (42%) and processed meals and snacks (41%) account for most of its revenue, with infant food (11%) and other products (6%) filling out the rest.
In North America, its largest revenue source, Heinz Ketchup, Classico Pasta Sauces and Smart Ones Frozen Foods are its leading products. In the UK and Australia, Heinz canned beans are especially popular, and in the Philippines and India, the company has been fast to adapt to the local tastes and customs; banana ketchup is popular in the Philippines, whereas ketchup without garlic and onion has been well received in India, where the two vegetables are not consumed for religious and cultural reasons. Two months ago, Heinz began the acquisition of Foodstar, a leading producer of soy sauce and bean curd in China, from Transpac Industrial Holdings for 165 million USD. This acquisition is highly significant as it is forecast to increase Heinz’s Chinese sales to 300 million. This is a great push on Heinz’s part to invest in the Chinese condiments industry. This demonstrates CEO Bill Johnson’s willingness to meet the needs of different countries and his dedicated focus on making a deep impression in emerging markets, which he has stated are intended to generate 25% of total revenues by 2016, up from the current 18%.
Despite rosy global growth prospects, there are three immediate hurdles that may trip Heinz. The first is rising commodity prices, which have been aggravated by the Russian grain ban, and its impact on Heinz’s margins. Corn is of prime importance to the company, as high fructose corn syrup is used in a plethora of its products, including 10% of its tomato ketchup. Secondly, as long as the US dollar stays strong, it could cause fluctuations in profit and hurt its overseas revenue, as its profits are reported in USD. Lastly, Western consumers have been increasingly health conscious, a pattern that has affected fast and processed foods across the board. Heinz, with heavy high fructose corn syrup in condiments and high sodium and preservatives in its frozen and processed products, is well aware of this shift in sentiment and has ridden the tide by offering new certified organic products such as Heinz Organic Ketchup.
Sentiment on Heinz stock has been bullish for the past year. Despite a bearish market, HNZ has risen 22% this past year. While it’s never tempting to buy a stock near 52-week highs, the forward P/E of 14.04 suggests that there is still room to grow. In addition, HNZ has a healthy quarterly dividend of 0.45 that has been steadily increased for the past 23 years.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the
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