Despite its languishing stock price, H.J. Heinz
The Heinz of the late 1800s started out quintessentially American, but the present-day company is a global operator, generating 60% of sales internationally in fiscal 2009. Likewise, Heinz's product reach extends far beyond the baseball-and-burger culture of its namesake ketchup. The company's portfolio includes Lea & Perrins and Classico sauces; TGI Fridays and Weight Watchers packaged meals; and a stable of infant nutrition foods that is helping to drive growth in emerging markets. Over the past three years, Heinz has enjoyed compound annual revenue growth of 4% to 9% in its core categories.
Heinz wrapped up its fiscal 2009 at the end of April. Earnings per share grew 10.3%, outpacing a (constant-currency) sales increase of 7.4%. However, investors should note that volume across the portfolio fell 1.5%, which means that on a net basis, its sales gains resulted from higher pricing. The U.S. food-service segment in particular suffered from an anemic economy. Management sees food-service performance improving in fiscal 2010; excluding negative currency effects, it predicts companywide growth in net sales, operating income, and earnings.
However, when we do bring currency headwinds to the table, the picture sours. Fiscal 2010 reported EPS might come in as low as $2.60 - $2.70, compared to the $2.90 per share earned in 2009. With Heinz’s reasonable dividend payout and interest coverage ratios, a year of flat-to-down earnings poses no financial threat, but the thought of bland GAAP results could explain why shares are trading at levels last seen in early 2006.
The bitter bite of currencies aside, Heinz is taking important steps to build brand equity. Partnering with Burger King
With U.S. and U.K. private label penetration in Heinz's top categories at 8.0% and 18.2%, respectively, we certainly have to count private label brands as a potential threat to the otherwise positive outlook. And although management has hedged roughly 50% of fiscal 2010 ingredient and packaging costs, volatile commodity prices could offset targeted margin improvements. But instead of being deterred by this possibility, consider doing some hedging of your own. Peppering your portfolio with shares of, say, Rio Tinto
All in all, I say Heinz belongs in your portfolio as well as your fridge. At a fiscal 2011 P/E of 12.4, and with a current dividend yield of 4.7%, the stock appears to have potential risks reasonably baked in. As for the bleak outlook on currency effects, I encourage investors to take the long view. When I wrote about Philip Morris International's
No one knows what will happen with Heinz's stock in the near term. But if you let the idea of reported results scare you away from the fundamentally positive business case, you may get stuck with sticky ketchup fingers -- while shareholders are busy enjoying savory profits.
More Foolishly flavorful reads:
H.J. Heinz and Petroleo Brasileiro are Motley Fool Income Investor selections. Philip Morris International is a Global Gains recommendation. Try any of our Foolish newsletters today, free for 30 days.