Although I formerly dubbed global food producer H.J. Heinz
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
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
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?
Put some spice in your investing: