The Global Demographic Tailwind

[DewDiligence]

Heinz: Another Beneficiary of The Global Demographic Tailwind

[This article was penned in response to HNZ’s FY1Q10 earnings report last week.]

http://www.ft.com/cms/s/3/bf0eeb1e-d90a-11de-99ce-00144feabdc0.html

›November 24, 2009

Posher condiments come and go, but ketchup is always there for a familiar dash of flavour. Heinz, which produced a soporific set of second-quarter results on Tuesday, serves a similar purpose. Aside from a few years of excitement after activist investor Nelson Peltz began to agitate in 2006, the stock has traded sideways for a decade. Like its defensive peers, Heinz has only rebounded by a third as equity markets have rallied since March. But it has consistently paid and increased its dividend and, yielding 4 per cent, offers comforting charms for investors nervous about weak consumer spending.

There have been fears consumers will trade down toward generic foods and private-label goods in increasing numbers. Still, the branded sauces, ready meals and snacks in which Heinz specialises – 15 brands contribute over two-thirds of sales – have proved resilient. The company has managed to increase prices in the past six months, and is used to private label competition in Europe, its largest market, where the share of supermarket-branded produce can be twice that of the US.

Making 60 per cent of revenues outside the US provides a nice currency hedge, and a quarter of those foreign sales are in fast-growing emerging markets that have helped keep turnover ticking upward for four years. Such branded essentials should be the final hold out if consumerism implodes, and will eventually find their way into the kitchens of the developing world as middle classes expand.

Profitability also remains decent, with operating margins solidly in the mid-teens and food commodity costs declining. On 15 times prospective earnings (against a 12 to 22 times historic range), without ambitions for large-scale acquisitions of peers, Heinz looks like a staple for any investors’ cupboard.‹