Ketchup king Heinz (NYSE:HNZ) plans to squeeze out a dollop of earnings news tomorrow morning. Will it be enough to drown a large order of fries, or barely enough to add some color?
What analysts say:
- Buy, sell, or waffle? Fourteen analysts follow Heinz, breaking down into two buys, eight holds, and four sells.
- Revenues. Analysts believe the firm's sales declined 4% in fiscal Q4 2006.
- Earnings. Quarterly profits are expected to fall 21% to $0.50 per share.
What management says:
On April 24, CEO William Johnson issued a letter to Heinz shareholders reaffirming previous predictions of $2.10 to $2.16 in pro forma profits for fiscal 2006. The letter also predicted 3%-4% sales growth, close to 8% operating earnings growth, and $800 million to $900 million in free cash flow for fiscal 2007 (which has already begun).
The impetus for the reaffirmation: Johnson announced that Heinz has essentially completed its reorganization, spinning off non-core businesses to focus on three core lines: ketchup and sauces, meals and snacks, and infant food. The goal now is to "sharpen our focus on growing our three core categories." Johnson's stated objectives include continuing to improve working capital management and reduce the firm's cash conversion cycle, and reducing costs to improve gross and operating margins.
What management does:
So far, Heinz's success can be termed "mixed" at best. Heinz has made great strides with its working capital. Over the last twelve months, sales have been rising at about 13% year over year, while accounts receivable declined slightly, and inventories actually declined 13%. Finally, as you can see in the below chart, rolling gross, operating, and net margins have all declined over the last 18 months.
|
Margins % |
9/04 |
12/04 |
3/05 |
6/05 |
9/05 |
12/05 |
|---|---|---|---|---|---|---|
|
Gross |
37.1 |
37.2 |
36.3 |
36 |
36 |
35.5 |
|
Op. |
16.2 |
15.8 |
15.5 |
15 |
14.9 |
14.8 |
|
Net |
9.6 |
9.1 |
8.4 |
7.9 |
7.9 |
7.4 |
The Fool says:
As fellow Fool Nathan Parmelee pointed out in his column earlier this month, Heinz is under great pressure to improve its performance. Billionaire investor Nelson Peltz is pushing the firm to improve its efficiency, and for all the rhetoric about improving the business contained in Johnson's letter, the numbers show there's still plenty of work to be done.
As lead Motley Fool Income Investor analyst Mathew Emmert (who has recommended the stock) put it: "Anything that motivates a management team to improve its performance is generally a positive for us."
Hopefully, investors will see some of that motivation at work in tomorrow's results.
Competitors:
- Campbell (NYSE:CPB)
- ConAgra (NYSE:CAG)
- Kraft (NYSE:KFT)
Suppliers:
- Crown Holdings (NYSE:CCK)
- Owens-Illinois (NYSE:OI)
- Silgan Holdings (NASDAQ:SLGN)
Heinz and Kraft are Motley Fool Income Investor picks. Take the newsletter dedicated to dividend payers for a 30-day free trial.
Fool contributor Rich Smith does not own shares of any company named above.
