Drip Portfolio Report
Monday, December 8, 1997
by Randy Befumo (TMFTemplr@aol.com)

ALEXANDRIA, VA (Dec. 8, 1997) -- Today we look at ketchup and pickle purveyor H.J. Heinz Company (NYSE: HNZ).

Description: H. J. Heinz Co. started life bottling horseradish in 1869. With only one bankruptcy along the way, the company quickly established itself as a major player in processed foods by developing tomato ketchup and bottling sweet pickles. Today the company is in all manner of ventures arrayed around its core processed foods businesses, including Weight Watchers and pet food.

Major brands include: Heinz ketchup, Heinz 57, StarKist tuna, Ore-Ida potatoes, 9-Lives cat food, Ken-L Rations dog food, The Budget Gourmet frozen meals, Kibbles N' Bits pet food, Jerky Treats, Amore cat food, Cycle pet food, Earth's Best baby food, Weight Watchers weight-loss program, John West tuna (the leading brand in the United Kingdom), and a number of other country-specific brands throughout the world.

Core Moneymaker: Ketchup, sauces, and other condiments, which accounted for 18% of sales in 1997. Pet food was a stunning 13% of consolidated revenues.

Financials: Because this is an overview, we'll only look at a few key things: how is the company priced relative to sales, earnings per share, and the expected growth rate (valuation); what are the current operating and net margins (margins); how much long-term debt does the company have (leverage); and what does management do with the cash that it generates (capital allocation)?

Valuation and Growth, and Share Performance: At $56 1/2 per share, Heinz's market cap is $21.2 billion (share price multiplied by 374.3 million shares outstanding). With trailing sales of $11.4 billion, the company trades at 1.86 times sales (which is the market cap divided by the trailing sales).

Heinz has $198.1 million in cash and $2.5 billion in long-term debt. Any acquiring company would consider the cash and debt in its valuation of Heinz, so we subtract the cash and add the debt to the market cap to get a more accurate value for the company -- the enterprise value. (An acquiring company would get the cash and have to pay the debt, so it needs to include these when valuing the company.) The enterprise value of Heinz is closer to $23.5 billion, and that value in relation to sales is 2.06. This is moderately higher than average.

On the earnings per share side, Heinz trades at 28.5 times trailing earnings per share. While expected to grow earnings per share 10% annually for the next five years, the stock trades at 26.4 times earnings estimates for this year, and 23.6 times fiscal 1998 estimates. Over the past five years the stock's price-to-earnings multiple has ranged from 13.5 (in 1987) to 28.5 (right now). The stock is not only trading at an all-time high, it is trading at an all-time valuation high based on earnings.

Margins Reviewed: Again, operating earnings divided by revenue gives us the operating margins. This number shows what the company is earning after the cost of the product and all the costs of running the business are subtracted. It indicates how efficient management is at running the business "operations" -- hence, operating margins.

For the last twelve months, Heinz had $11.4 billion in sales and $1.2 billion in operating income, giving operating margins of 10.5%. This is an okay operating margin, but nothing to get terribly excited about.

One thing to consider with Heinz is that the company is pretty late on the business rationalization train. It still has a lot of non-complementary businesses that may not end up being part of its strategic plan. As a consequence, there is some potential room for margin improvement and higher-than-expected earnings growth should the company get aggressive with divestitures like Campbell Soup last year or Sara Lee this year.

Leverage reviewed: With $2.5 billion in long-term debt and $11.4 billion in sales, Heinz has a 22.0% debt-to-sales ratio. This is about average for a food company.

Capital allocation: Management pays a 2.2% dividend, which is above the average for the S&P 500. The company repurchases a fair amount of stock, normally around the same amount it pays out in dividends. This means that the company is effectively deploying 4.5% of the current income.

The Snapshot for Heinz:

Ticker: HNZ
Recent Price: $56 1/2

Trailing 12-month sales: $11.4 billion
Trailing 12-month oper. earnings: $1.2 billion
Operating Margins: 10.5%
Trailing 12-month EPS: $1.98

Fiscal '97 EPS estimates: $2.14
Fiscal '98 EPS estimates: $2.34

Enterprise value to sales: 2.06
Current P/E: 28.5
P/E on 1998 EPS: 26.4
P/E on 1999 EPS: 23.8
Long-term expected growth rate: 10%
Yield: 2.20%

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Stock   Close    Change
jnj   65 3/16      0
intc  78 7/16    + 7/8
              Day      Month     Year       History
Drip         0.51%     0.75%     (9.97%)     (9.97%)
S&P 500     (0.14%)    2.82%     32.62%       3.26% 
Nasdaq       1.08%     3.19%     27.92%       3.62%      

Last Rec'd   Total #   Security      In At   Current
11/03/97      4.835       INTC     $81.623   $78.438
11/14/97      1.000       JNJ      $62.125   $65.188

Last Rec'd  Total#  Security  In At    Value   Change
11/03/97   4.835     INTC    $394.69  $379.28  ($15.41)
11/14/97   1.000     JNJ      $62.13   $65.19    $3.06 

Base:   $900.00
Cash:   $389.75**
Total:  $834.22

GOAL: The portfolio began with $500 on July 28, 1997, 
adds $100 on the 15th of every month, and the goal 
is to grow the port to $150,000 by August of the year 2017. 

**Transactions in progress:
11/24/97: $100 sent to purchase more Intel.

The Drip Portfolio has been divided into 
37.063 shares with an average purchase
price of $24.283 per share.