Although I formerly dubbed global food producer H.J. Heinz (NYSE:HNZ) special sauce for investors' portfolios, first-quarter 2010 results reveal that the company is selling fewer products, even as competitors find consumers hungrier for their brands. While H. J. Heinz management doesn't relish the situation, it doesn't seem to be giving the company too much heartburn.
Reported top- and bottom-line results were negative because of currency impact, but on a constant-currency basis, sales and earnings per share rose 4.5% and 9.7%, respectively. A huge jump in operating free cash flow was also a standout positive.
Yet overall volume -- derived from the namesake ketchup line, plus a full pantry of frozen meals, snacks, and a brisk baby food business -- declined 4.3% during the quarter. Sure, the comparison was difficult, given strong year-ago performance, but this now marks Heinz's fourth consecutive quarter of volume contraction. Meanwhile, food makers Kraft (NYSE:KFT), J.M. Smucker (NYSE:SJM), ConAgra (NYSE:CAG), and General Mills (NYSE:GIS) all held or grew volume in their most recently completed quarters.
So what happened? Did Heinz management eat a bad hot dog and get thrown off its game? Nope. In fact, some of that volume softness was intentional. When consumers turn tight-fisted, a company can choose to chase volume by lowering prices and continuing to support lower-margin products, or it can largely hold fast on pricing while investing in the brand equity of its higher-margin goods through innovation and increased marketing.
I applaud Heinz for choosing the latter strategy, and I believe the long-term result will be stronger brands and better financial results. Need an object lesson in volume growth at the expense of margins? Take a gander at food, home, and personal-care behemoth Unilever's (NYSE:UL) recent results. The four companies I previously mentioned, however, managed to attain the best of both worlds: Steady-to-growing volume and expanding margins. That should leave Heinz shareholders feeling somewhat unsettled.
In the end, H.J. Heinz's product portfolio may simply not have the best competitive position to weather the recession. That's no reason to sell shares -- which have appreciated considerably since my previous vote of confidence -- but it also provides little impetus to buy. Based on a forward P/E comparison with fellow food producers, Heinz's volume woes are not reflected in its share price, whereas investors can pick up shares of the better-performing ConAgra at a compelling peer discount.
As long as recessionary forces persist, I'd consider looking somewhere other than Heinz to make a fresh investment in the consumers staples sector. Alternately, hang tight for some combination of improved company results and a more palatable stock price. After all, a meal always tastes better when you have to wait for it, right?
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