The Rising Influence of Rising Affluence

[DewDiligence]

Heinz Stock Is Not in a Pickle

[This piece from Barron’s mostly recites stuff that’s been previously posted on this board.]

http://online.barrons.com/article/SB50001424052970203990104576190823302889178.html

›MARCH 9, 2011
By JOHANNA BENNETT

With packaged-food stocks out of favor with Wall Street, condiment king H.J. Heinz has been left on the shelf.

Mired at nearly $50 a share, Heinz (ticker: HNZ) has climbed a paltry 7% over the last 12 months, lagging gains by the Dow Jones U.S. Food Products Index and the Standard & Poor's 500 Index.

As with the rest of the food industry, Heinz faces higher raw material costs and the difficulty of passing on those costs to price-conscious consumers emerging from a recession.

Heinz, however, has managed to dodge some of the commodity squeeze. Prices for tomatoes and potatoes, two of the main ingredients found in Heinz's products, haven't spiked the same way as other commodities like sugar, wheat and milk.

Add a growing presence in emerging markets, strong brands, new products, and a 3.7% dividend yield, and the stock could return 20% to investors over the next 12 months.

"At 15 times earnings, the stock is undervalued," says Eric Katzman, an analyst with Deutsche Bank. "Clearly, the company is better positioned for the long term than their peers."

Others seem equally upbeat.

Late last week, Citigroup analyst David Driscoll hiked his 12-month price target to $57 a share after Heinz announced that it's acquiring an 80% stake in Brazilian food manufacturer Coniexpress S.A. Industrias Alimenticias [#msg-60572753].

With the acquisition, sales in emerging markets will expand to $2 billion, or 20% of Heinz's top line next year, a goal the company had expected to reach in 2013.

Founded in 1896, Heinz generates annual revenue of nearly $11 billion by selling its namesake ketchup, Ore-Ida frozen potatoes, Classico pasta sauce, Weight Watchers meals and other products.

It gets 85% of its sales from products found on supermarket shelves. The rest comes from condiments sold to restaurants and other institutions.

But Heinz stands apart from other U.S.-based food companies for its international exposure and its success in emerging markets.

"Heinz has been ahead of the curve," says Deutsche's Katzman. Acquisitions have allowed it to build positions in places like China, India and Latin America, where fast-rising sales are fueling roughly 30% of the company's top-line growth.

And by 2016, it hopes to get roughly 30% of its sales from these and other developing markets, a goal that led Barrons.com to weigh in favorably on the stock last year.

"You have to give this company credit for really setting things up well over the last 10 years," says Jon Fisher, a portfolio manager at Fifth Third Asset Management. "Food products don't just stumble their way onto store shelves in Russia."

Heinz's earnings-per-share forecasts for the current fiscal year slated to end in April have grown increasingly bullish.

In February, it raised its full-year guidance to a range of $3.04 to $3.10 a share, a 6% to 8% increase over last year.

The Street, meanwhile, expects earnings to climb to $3.33 a share next year [i.e. in the fiscal year ending 4/30/12].

Still, food companies face a difficult consumer and economic environment and fierce competition, not to mention 7% to 8% inflation in raw material costs,

At Heinz, however, costs are rising around 4%.

Still, the company has hiked prices for various products in the U.S., and launched new products, including dip-and-squeeze ketchup packets.

And over the next five years, it looks to generate roughly $1 billion in savings through partnerships and new technology.

During that same time period, profit could grow 8% annually, according to Deutsche's Katzman.

Investors will have to pay up a bit for that growth.

At 15.3 times forward earnings, the stock trades at a 10% premium to the S&P 500, according to Thomson Reuters.

If the stock hits Citigroup's target of $57, it will trade at 17.6 times forward earnings, which is a reasonable stretch for this stock.

Of course, Heinz faces a few challenges.

With 60% of sales generated outside the U.S., currency risk is always a concern. High commodity prices remain an overhang. New products could flop, and consumers could rebel at price hikes.

Investors, meanwhile, will listen carefully during Heinz's annual investor meeting in May for financial forecasts for the fiscal year slated to end in April 2012.

Still, with a strong dividend, growing free cash flow and an enviable emerging-markets position, Heinz looks appetizing.‹