Years ago, I worked for Star-Kist Foods when it was owned by H.J. Heinz
Heinz has been divesting its slow-growing and less profitable brands. For example, in Dec. 2002, the company sold its Star-Kist tuna, 9Lives cat food, and Kibbles 'n Bits dog food brands, to name a few, to Del Monte Foods
At the time, some speculated that Heinz was becoming window-dressing for giants like Kraft Foods
So how fast is the current Heinz growing sales and profits? Revenue for the latest quarter rose 6.3% over the comparable year-ago period. Before saying, "That's not too bad," consider that acquisitions accounted for 5.4% of that rise. At its core, Heinz is still no jackrabbit.
The latest quarter's earnings per share rose 10.7%. Before you celebrate, notice that the effective tax rate fell from 32% to 24.8%, due to a favorable one-time tax ruling. Use adjusted operating income, and the gain is only 5.2%.
It's about the cash, right?
If my dueling opponent is sharp, and he is, he's going to claim that Heinz is all about free cash flow. But for the last six months, operating free cash flow (cash provided by operations minus capital expenditures) decreased 9% from the same period last year.
The company does pay a solid 3.4% dividend, but consider this: After paying out 57% of net income ($406 million over the past twelve months) for dividends, there isn't that much cash left for the company to make its acquisitions and pay down the net debt (total debt minus cash) of $5 billion. Oh, and debt-to-equity stands at a lofty 273%. Consider, too, that long-term debt has increased almost $1 billion, or 24%, over the past quarter. There's free cash flow, but the company is heaping on debt so it can grow.
What's that debt buying?
Heinz just paid $855 million for Groupe Danone's
Other recent deals included Petrosoyuz, a Russian company that is No. 1 in mayonnaise and spreads/margarines and first runner-up in ketchup, and Nancy's Specialty Foods, a producer of premium appetizers, quiche entrees, and desserts. Too bad no financial details were released, or we might be able to analyze these purchases. Their impact on the balance sheet is obvious, though. The company's debt is mounting because it's buying assets faster than it's booking cash.
The bottom line
In August, at the annual shareholders meeting, Heinz said: "As we look out over the next three years, we are aiming for average annual sales growth of 3% to 4%, and EPS growth of 6% to 8%, excluding any divestitures or one-off events. This would represent excellent performance in our industry."
Excellent performance or not, you would be paying 16.8 times trailing earnings to buy a company analysts expect to grow earnings 7% annually for the next five years. That's a very rich premium. Consider Motley Fool Hidden Gems recommendation Fresh Del Monte Produce
H.J. Heinz is close to its 52-week low for a reason. Its stock isn't cheap because of its growth rate. The company continues to pile on debt and sell its assets cheaper on an EBITDA basis than its asset purchases. Sorry, Charlie, but there are better investment alternatives, even in the food business.
Heinz, Unilever, and Kraft Foods are Motley Fool Income Investor selections.
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